<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1996
REGISTRATION NO. 333-10965
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
THE TITAN CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-2588754
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
3033 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121-1199
(619) 552-9500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
BERNARD M. HIRL
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
3033 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121-1199
(619) 552-9500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID A. HAHN, ESQ. STEVEN R. FINLEY, ESQ.
LATHAM & WATKINS GIBSON, DUNN & CRUTCHER LLP
701 "B" STREET, SUITE 2100 200 PARK AVENUE, 48TH FLOOR
SAN DIEGO, CALIFORNIA 92101 NEW YORK, NEW YORK 10166-0193
(619) 236-1234 (212) 351-4000
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THIS PRELIMINARY PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO
COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED IN FINAL FORM. UNDER
NO CIRCUMSTANCES SHALL THIS PRELIMINARY PROSPECTUS CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH JURISDICTION.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 28, 1996
$30,000,000
ABCDEF
% CONVERTIBLE SUBORDINATED DEBENTURES DUE OCTOBER , 2003
(INTEREST PAYABLE OCTOBER AND APRIL )
The Debentures will be convertible at the option of the holder at any time
following the date of original issuance, unless previously redeemed, into shares
of common stock, par value $0.01 per share (the "Common Stock"), of The Titan
Corporation ("Titan" or the "Company") at a conversion price of $ per share,
subject to adjustment under certain circumstances. The Common Stock is listed on
the New York Stock Exchange ("NYSE") under the symbol "TTN." On October 25,
1996, the closing sales price of the Common Stock on the NYSE was $3.125 per
share. See "Price Range of Common Stock and Dividend Policy."
The Debentures will be redeemable, in whole or in part, at the option of the
Company, at any time on or after October , 1999, at the redemption prices set
forth herein, plus accrued interest to the date of redemption. Each holder of
Debentures may require the Company to repurchase such holder's Debentures, in
whole or in part, in the event of a Change in Control (as defined herein) at a
purchase price equal to 100% of the principal amount of such Debentures plus
accrued interest to the date of repurchase.
The Debentures will be general unsecured obligations of the Company and are
subordinate in right of payment to all Senior Debt (as defined herein) of the
Company. The Indenture will not restrict the incurrence of Senior Debt or other
indebtedness by the Company or any of its subsidiaries.
The Debentures will be issued only in book-entry form through The Depository
Trust Company (the "Depository"). Interests in the Debentures will be shown in,
and transfer thereof will be effected only through, records maintained by the
Depository and its participants. Except as provided herein, Debentures in
definitive form will not be issued. See "Description of Debentures." The Company
has applied to list the Debentures for trading on the NYSE.
For a discussion of certain risks of an investment in the Debentures offered
hereby, see "Risk Factors" on pages 8-12.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public* Commissions+ Company++
<S> <C> <C> <C>
Per Debenture................................ % % %
Total**...................................... $ $ $
</TABLE>
- ------------
* Plus accrued interest, if any, from , 1996.
+ The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
++ Before deducting expenses of the offering payable by the Company estimated
to be $400,000.
** The Company has granted the Underwriter a 30-day option to purchase up to
$4,500,000 principal amount of Debentures at the same price per Debenture
solely to cover over-allotments, if any. If such option is exercised in full,
the total Price to Public will be $ , the total Underwriting Discounts
and Commissions will be $ and the total Proceeds to Company will be
$ . See "Underwriting."
-------------------
The Debentures are being offered by the Underwriter as set forth under
"Underwriting" herein. It is expected that delivery of the Debentures will be
made through the book-entry facilities of the Depository on or about
, 1996. The Underwriter is:
DILLON, READ & CO. INC.
The date of this Prospectus is , 1996
<PAGE>
[PHOTOGRAPH] [PHOTOGRAPH]
The Titan Corporation provides sophisticated communications and information
systems products and services to large commercial and government customers
[PHOTOGRAPH] [PHOTOGRAPH]
[PHOTOGRAPH] [PHOTOGRAPH]
[See Graphic Appendix]
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement, as well as such reports, proxy
statements and other information filed by the Company, may be inspected and
copied (at prescribed rates) at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W, Washington,
D.C. 20549 and at the Commission's regional offices at 75 Park Place, New York,
New York 10007, and the Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W, Washington,
D.C. 20549 at prescribed rates. In addition, such reports, proxy statements and
other information concerning the Company may also be inspected at the offices of
the New York Stock Exchange, at 20 Broad Street, New York, New York 10005. The
Commission maintains a web site on the World Wide Web that contains reports,
proxy statements and other information filed by registrants under the Exchange
Act, including the Company, at "http://www.sec.gov."
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the Debentures and the Common
Stock issuable upon conversion of the Debentures offered hereby. This Prospectus
omits certain information and exhibits included in that Registration Statement,
copies of which may be obtained upon payment of a fee prescribed by the
Commission or may be examined free of charge at the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are hereby incorporated by reference: (i) Annual Report on Form
10-K for the fiscal year ended December 31, 1995; (ii) Quarterly Reports on Form
10-Q for the quarters ended March 31, 1996 and June 30, 1996; (iii) Proxy
Statement for the Annual Meeting of Stockholders held on May 16, 1996; and (iv)
Current Reports on Form 8-K dated March 5, 1996, April 25, 1996, June 6, 1996
(as amended by Form 8-K/A dated August 7, 1996) and October 17, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Debentures offered hereby shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the respective dates of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which is or is deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all of the documents
incorporated herein by reference (not including the exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Requests for such copies should be directed to Corporate Secretary,
The Titan Corporation, 3033 Science Park Road, San Diego, California 92121,
Telephone: (619) 552-9500.
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES OR
COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE.
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "TITAN" OR THE "COMPANY"
INCLUDE THE TITAN CORPORATION AND ITS SUBSIDIARIES. EXCEPT AS OTHERWISE
INDICATED HEREIN, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITER'S OVER-ALLOTMENT OPTION.
Titan provides sophisticated communications and information systems products
and services to large commercial and government customers. Titan utilizes its
core satellite and wireless communications and large-scale software applications
technology and expertise to target rapidly growing markets.
In its communications business, Titan specializes in the development and
production of advanced satellite terminals, voice/data modems, networking
systems and other products used to provide reliable and secure communications
for a variety of voice, data and video applications. In the commercial
marketplace, Titan applies its technology and expertise to provide bandwidth
efficient and cost-effective satellite earth stations for telephony services in
locations with little or no wired telephony infrastructure. Titan also offers a
conditional access system which provides secure distribution of satellite,
wireless or cable TV video programming. The Company believes these commercial
markets represent significant opportunities for future growth. In the government
area, the Company is a leading provider of secure ultra high-frequency ("UHF")
communications systems to the U.S. military. In the current environment of
limited resources and multiplying defense requirements, the government is
placing increasing reliance on secure communications systems that allow forces
to collect and assimilate information and rapidly respond to hostile situations.
The Company's information systems business provides systems design and
object-oriented software development services to assist commercial and
government customers to engineer new information systems or to re-engineer
existing information systems to facilitate the migration from legacy systems to
distributed computing environments often utilizing the Internet and/or an
intranet. These design activities involve implementing a distributed network
systems architecture that satisfies a customer's specific requirements while
taking into account existing hardware and software systems. Titan provides a
complete integrated system solution to a client's requirements using both
commercial hardware and software as well as custom or semi-custom
Titan-developed software. Titan's commercial business focuses on the
telecommunications and, to a lesser extent, financial services industries. The
Company's government funded efforts include developing and implementing
enterprise-wide information networks for intelligence agencies, NATO and the
Federal Aviation Administration where it can capitalize on its extensive
knowledge of such customers' operations and needs.
The Company's strategy is to grow its communications and information systems
businesses by exploiting its technology base and expertise, expanding its
commercial and government customer base, and developing new products and
services to address the needs of these customers. In pursuing communications and
information systems markets, the Company capitalizes on its core technology and
expertise in satellite and wireless communications and large-scale software
design, development and integration. The Company continually seeks and reviews
attractive commercial market opportunities within its core communications and
information systems domains, and will pursue opportunities where it believes it
can utilize its defense-derived technologies to develop a product or service to
address a significant market need or demand, as it has done with satellite
communications, client/server software and broadband communications. The
Company's defense and government business strategy is to focus on key markets
where it can exploit its communications and information systems technology base
and expertise, such as utilizing its demand assigned multiple access ("DAMA")
technology and other technologies to develop standardized satellite
communications products and addressing the government's need to migrate from
mainframe computer systems to distributed client/server networks.
The Company continually evaluates potential acquisitions of commercial and
government businesses, technologies or products which are complementary to the
Company's core communications and information systems businesses. Titan also is
pursuing strategic alliances with other industry participants in order to
provide additional financial, technological and/or marketing resources for the
Company's core businesses.
4
<PAGE>
In addition to the Company's core communications and information systems
businesses, Titan's technology and expertise permit it to bid for
externally-funded research and development projects in selected areas. These
projects generate technologies that Titan believes can create additional value
for the Company. Titan is exploiting these projects and its technologies by
developing new businesses and through licensing, joint venturing or sales to
third parties. For example, Titan has developed new businesses in medical
product sterilization and environmental services. See "Business--Emerging
Technologies."
The Company's headquarters are located at 3033 Science Park Road, San Diego,
CA 92121 and its telephone number is (619) 552-9500. The Company's internet
address on the world-wide web is "http://www.titan.com."
THE OFFERING
<TABLE>
<S> <C>
The Debentures............... $30,000,000 ($34,500,000 if the over-allotment option is
exercised in full) of % Convertible Subordinated
Debentures (the "Debentures") due October , 2003.
Interest Payment Dates....... October and April , commencing April , 1997.
Maturity Date................ October , 2003
Conversion Rights............ The holders of the Debentures will be entitled at any time
following the date of original issuance, subject to prior
redemption or repurchase, to convert the Debentures, or
portions thereof (if the portions are $1,000 or whole
multiples thereof) into shares of the Common Stock at the
conversion price of $ per share (subject to certain
adjustments). See "Description of Debentures--Conversion."
Optional Redemption.......... The Debentures are not redeemable by the Company prior to
October , 1999. On and after October , 1999, the
Debentures will be redeemable on at least 30 days' notice at
the option of the Company, in whole or in part at any time,
at the redemption prices set forth herein, in each case
together with accrued interest. See "Description of
Debentures--Optional Redemption."
Change in Control............ Upon a Change in Control, each holder of Debentures will
have the right (a "Repurchase Right") to require the Company
to repurchase all of such holder's Debentures, or a portion
thereof (if the portions are $1,000 or whole multiples
thereof) at 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Debentures--Repurchase at
Option of Holders Upon Change in Control."
Subordination................ The payment of the principal of and premium, if any, and
interest on the Debentures will be subordinated in right of
payment to the prior payment in full of all existing and
future Senior Debt. The Indenture contains no limitations on
the incurrence of additional Senior Debt or other
indebtedness by the Company. See "Description of
Debentures-- Subordination of Debentures."
Use of Proceeds.............. The net proceeds to the Company from the sale of the
Debentures offered hereby are expected to be $28.3 million.
Such net proceeds are expected to be used to repay
borrowings under the Company's bank credit facilities. See
"Use of Proceeds."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Book-Entry Trading........... The Debentures will be issued only in book-entry form
through The Depository Trust Company (the "Depository").
Interests in the Debentures will be shown in, and transfer
thereof will be effected only through, records maintained by
the Depository and its participants. Except as provided
herein, Debentures in definitive form will not be issued.
See "Description of the Debentures."
Events of Default............ An Event of Default with respect to the Debentures includes
the occurrence of any of the following: default for 30 days
in payment of interest; default in payment of principal at
maturity, upon redemption or exercise of a Repurchase Right
or otherwise; default in payment on Debt (as defined herein)
at maturity of at least $5,000,000 principal amount, or
default on Debt and, as a result, payment of at least
$5,000,000 principal amount of Debt is accelerated and in
either case such default continues for 30 days; failure by
the Company for 60 days after notice to it to comply with
any of its other agreements in the Indenture or the
Debentures; and certain events of bankruptcy or insolvency.
If an Event of Default occurs and is continuing, the Trustee
or the holders of at least 25% in principal amount of the
Debentures may declare all the Debentures to be due and
payable immediately. See "Description of
Debentures--Defaults and Remedies."
Listing...................... The Company has applied to list the Debentures for trading
on the NYSE. The Company's Common Stock is listed for
trading on the NYSE under the symbol "TTN."
Risk Factors................. For a discussion of certain risks of an investment in the
Debentures, see "Risk Factors."
</TABLE>
6
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 146,484 $ 148,762 $ 149,414 $ 136,206 $ 133,967 $ 64,472 $ 60,334
Gross profit............................... 28,433 35,368 14,840 36,285 31,736 17,686 13,368
Selling, general and administrative
expense................................... 18,805 23,256 27,230 22,511 23,538 11,821 12,219
Research and development expense........... 3,915 4,004 2,257 5,339 5,904 3,475 2,379
Depreciation and amortization.............. 4,466 4,595 4,495 3,424 4,117 2,057 2,541
Operating profit (loss).................... 5,713 8,108 (14,647) 9,635 (3,955) 2,390 (1,230)
Interest expense........................... 2,322 1,225 1,590 923 1,154 469 1,157
Interest income............................ 143 84 84 291 95 43 18
Net income (loss).......................... 3,359 3,631 (7,906) 5,953 (3,807) 1,254 (1,611)
Dividend requirements on preferred stock... 695 695 695 695 695 347 366
Net income (loss) applicable to common
stock..................................... 2,664 2,936 (8,601) 5,258 (4,502) 907 (1,977)
Net income (loss) per average common
share..................................... $ 0.25 $ 0.26 $ (0.73) $ 0.40 $ (0.33) $ 0.07 $ (0.14)
Average number of common shares
outstanding............................... 10,661 11,429 11,739 13,288 13,445 13,836 14,418
Ratio of earnings to fixed charges......... 1.72 2.82 -- 3.87 -- 2.27 --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1996
----------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(1)
--------- --------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 188 $ 4,344 $ 5,374 $ 5,129 $ 5,833 $ 3,586 $ 13,250
Working capital............................. 34,000 38,552 19,238 21,439 19,875 15,292 43,542
Property and equipment, net................. 8,195 6,901 9,689 12,932 18,295 21,022 21,022
Total assets................................ 75,644 90,679 93,214 81,903 95,170 121,484 132,898
Total debt.................................. 10,500 16,650 18,192 1,321 14,500 27,286 38,700
Redeemable preferred stock.................. -- -- -- -- -- 3,000 3,000
Stockholders' equity........................ 30,650 36,016 29,321 38,768 38,639 49,089 49,089
</TABLE>
- -------------------
(1) Adjusted to reflect the issuance of the Debentures and the application of
the estimated net proceeds therefrom. See "Use of Proceeds."
(2) On October 17, 1996, the Company reported preliminary unaudited revenues and
a net loss of $34.9 million and $2.0 million for the three months ended
September 30, 1996, as compared to revenues and net income of $35.0 million
and $0.5 million for the comparable period in 1995. For more information,
see "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Recent Operating Results."
7
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SPECIFIC RISK FACTORS
SET FORTH BELOW AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
BEFORE DECIDING TO INVEST IN THE DEBENTURES. CERTAIN STATEMENTS IN THIS
PROSPECTUS THAT ARE NOT HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS"
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
RISKS, UNCERTAINTIES AND OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE
FOLLOWING RISKS:
ENTRY INTO COMMERCIAL BUSINESS
The Company's revenues historically have been derived principally from
business with the Department of Defense and other government agencies. Since
1991, the Company has pursued a strategy that includes leveraging the technology
from its defense business to build commercial businesses. This strategy presents
certain significant risks for the Company. Many of the Company's commercial
businesses, such as broadband communications, satellite communications and
medical sterilization, remain in an early stage. As such, the Company is subject
to all the risks inherent in the operation of a start-up venture, including the
need to develop and maintain marketing, sales and customer support capabilities,
to secure appropriate third party manufacturing arrangements, to respond to the
rapid technological advances inherent in these markets, to secure the necessary
financing to support these activities and, ultimately, to design and manufacture
products or provide services acceptable to buyers in its target markets. Certain
of the Company's new products, including products for which the Company has
contracts for delivery, are still in the testing stage. There can be no
assurance that such tests will be completed satisfactorily or that the Company
will be able to satisfy all of the requirements for delivery of and payment for
these products. In addition, many of the opportunities in the broadband
communications and satellite communications businesses are large, international
projects which involve lengthy sales cycles. The Company's efforts to address
these risks have required, and will continue to require, significant
expenditures and dedicated management time and other resources. There can be no
assurance that the Company will be successful in addressing these risks or in
developing these commercial businesses.
Certain investments in the Company's start-up commercial ventures have been
capitalized and are included in the Company's balance sheet, primarily within
the captions of Property and Equipment, Other Assets and Inventory. At June 30,
1996, these capitalized investments aggregated approximately $15.4 million, and
consisted of approximately $9.0 million net book value of the Company's two
medical sterilization facilities, approximately $4.3 million of capitalized
software costs in the Company's broadband communications unit and approximately
$2.1 million of non-recurring engineering costs related to the commercial
satellite communications business. None of these businesses has yet achieved
profitability and there can be no assurance that any of them will do so. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
RECENT LOSSES; DEFICIENCY OF EARNINGS TO FIXED CHARGES
The Company reported net losses of $3.8 million and $1.6 million for the
year ended December 31, 1995 and the six months ended June 30, 1996,
respectively. On October 17, 1996, the Company reported a net loss for the
quarter ended September 30, 1996 of $2.0 million. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Recent Operating
Results." The Company's net loss in the first six months of 1996 was due
primarily to continuing planned investment in the commercial Communications
Systems segment. The Company plans to continue to make substantial investments
in the Communications Systems segment, principally in the broadband
communications business, and expects that the Communications Systems segment
will incur significant losses during the remainder of 1996. There can be no
assurance that the Company will achieve profitability in the future or be able
to generate earnings sufficient to meet its interest and principal payment
obligations. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition."
For the years ended December 31, 1993 and 1995 and for the six months ended
June 30, 1996, the Company's earnings were insufficient to cover fixed charges
by approximately $16,153,000, $5,014,000 and $2,369,000, respectively. The ratio
of earnings to fixed charges for the year ended 1994 was 3.87. Fixed charges
consist of interest expense (including amortization of deferred financing costs)
and the portion of rental expense that is representative of an interest factor.
8
<PAGE>
1995 RESTRUCTURING
The Company recorded a charge of approximately $5.4 million in 1995 relating
to a plan of restructuring designed to focus the Company on its core businesses
and better position the Company for growth and strategic transactions. As part
of the restructuring, the Company redefined its business into four segments:
Defense Systems, Software Systems, Communications Systems and Emerging
Technologies. The restructuring also involves the dispositions of certain
businesses not central to the Company's long-term strategy, significant
reorganizations of its Software Systems segment and medical products
sterilization business, personnel reductions and other actions associated with
reorganizing the structure of the Company. There can be no assurance that the
Company will be able to implement these restructuring activities as initially
planned or that there will not be further restructurings.
RELIANCE ON MAJOR SOFTWARE CUSTOMER
The Company's Software Systems business is substantially dependent on
business from a major telecommunications company. Revenues from this customer
totalled approximately $9.7 million, $24.3 million, $24.5 million and $4.9
million, or 7%, 18%, 18% and 8% of total Company revenues in the years ended
1993, 1994 and 1995 and the six months ended June 30, 1996, respectively. In the
second half of 1995, the Company began to experience reduced demand from this
customer and this trend continued in the first six months of 1996. The Company
believes that this reduced demand resulted primarily from the customer's
reassessment of its overall business process reengineering program. The customer
also expressed concerns about the quality of work performed on certain projects,
which the Company believes were related to the Company rapidly expanding to meet
this customer's increasing demand. The Company believes that it has addressed
these concerns, and the Company remains on this customer's list of approved
vendors. In addition, the Company has now completed major portions of existing
work for this customer which contributed to the trend of declining revenues, and
in the second quarter of 1996, the Company incurred additional costs in
connection with a negotiated conclusion of certain programs with this customer.
The loss of this customer, or a substantial delay or further decrease in the
amount of its business, would continue to have a material adverse effect on the
Company's results of operations and financial condition.
NON-COMPLIANCE WITH BANK COVENANTS; NEED FOR ADDITIONAL LIQUIDITY
The Company's continued investment in its emerging commercial businesses,
particularly within the Communications Systems segment, has placed significant
demands on the Company's capital resources. During the six months ended June 30,
1996, the Company used $3.2 million in cash for operating requirements.
Borrowings under the Company's bank line of credit have been a principal source
of funding these operating requirements. As of June 30, 1996, the Company was
not in compliance with covenants under the line of credit which prohibited
consecutive quarterly losses and required the Company to maintain stipulated
ratios of total liabilities to tangible net worth and minimum interest coverage.
The Company obtained a waiver from the bank for these conditions as of June 30,
1996, subject to the bank's right to secure the outstanding obligations under
the line of credit with the Company's assets. In September 1996, the Company
entered into an amendment to the line of credit which increased the maximum
borrowing availability from $17.0 million to $22.0 million. The borrowing
availability will decrease, however, to $14.0 million on the earlier of (a)
January 1, 1997 or (b) the receipt by the Company of an aggregate of $20.0
million of new capital from the sale of assets or issuance of subordinated debt
(which would include the Debentures) or capital stock which would add to the
Company's net worth. Under the amendment, Titan and its wholly-owned subsidiary,
Titan Information Systems Corporation ("TIS"), granted the bank a security
interest in substantially all of their non-real property assets, including
accounts receivable, inventory, equipment and patents. In addition, the Company
pledged the stock of TIS and its wholly-owned subsidiaries, Eldyne, Inc.
("Eldyne") and Unidyne Corporation ("Unidyne"), to the bank and agreed that if
it has not received $20 million in new capital by November 15, 1996 the Company
would assign to the bank all rights to payment of monies under its government
contracts. The amendment also deleted or revised certain financial covenants.
The amended line of credit does, however, contain financial covenants which
require the Company to maintain stipulated levels of net worth, a specified
ratio of total liabilities to tangible net worth and a specified quick ratio.
The maturity date of the line of credit is May 30, 1997.
Eldyne and Unidyne also have a bank line of credit, which is secured by the
assets of those entities and Diversified Control Systems, Inc. ("DCS"), another
subsidiary of the Company. This line of credit agreement contains certain
financial covenants that require each of Eldyne and Unidyne to maintain
stipulated levels of
9
<PAGE>
tangible net worth, working capital and leverage. Eldyne and Unidyne obtained a
waiver from the bank, effective as of June 30, 1996, with respect to violations
of certain of these financial covenants which existed as of June 30, 1996. The
maturity date of this line of credit is December 31, 1996.
The net proceeds from the sale of the Debentures offered hereby will repay
borrowings under these bank credit facilities. See "Use of Proceeds." Following
application of such net proceeds, the Company intends to renegotiate its credit
agreements to provide for more favorable terms, although there is no assurance
that it will be able to do so. Accordingly, there can be no assurance that the
Company, Eldyne or Unidyne will achieve compliance in the future with the
covenants of their respective line of credit agreements or other financing
agreements or that future waivers of non-compliance may be obtained from their
respective banks or other relevant parties.
Cash requirements for the remainder of 1996 will continue to be significant.
The Company intends to continue its investment in the further development of
business ventures within the Communications Systems segment. To finance this
investment the Company is investigating a combination of alternatives that
include continued working capital management, utilization of the remaining
availability under the Company's bank line of credit ($1.3 million of the
current $22 million of availability existed at September 30, 1996), and new debt
and equity sources, including the proceeds from the sale of the Debentures
offered hereby. There can be no assurance that the Company will be successful in
obtaining such additional funding. In such event, the Company would have to
reassess its investment in its commercial businesses. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
DEPENDENCE ON GOVERNMENT CONTRACTS
Titan's U.S. Government customers include the Navy, Army, Air Force, Federal
Emergency Management Agency, Federal Aviation Administration, Defense Special
Weapons Agency and other U.S. and allied government agencies. The Company's
business is dependent to a large extent upon continued funding from these
sources. U.S. defense budgets and the budgets of other government agencies have
been declining in real terms since the mid-1980's, and may continue to do so in
the future. Further significant reductions in defense expenditures could
adversely affect the Company's results of operations and financial condition.
For the years ended December 31, 1993, 1994, and 1995, and the six months ended
June 30, 1996, direct and indirect U.S. government business represented
approximately 75%, 68%, 61%, and 68%, respectively, of the Company's revenues.
These percentages will be impacted going forward by the Company's acquisition in
May 1996 of Eldyne, Inc., Unidyne Corporation and Diversified Control Systems,
substantially all of the revenues of which are derived from direct and indirect
U.S. Government business.
The Company's contracts with the government and its subcontracts with
government prime contractors are subject to termination for the convenience of
the government, and termination, reduction or modification in the event of
change in the government's requirements or budgetary constraints. When the
Company participates as a subcontractor, such contracts are also subject to the
failure or inability of the prime contractor to perform its prime contract. In
addition, the Company's contract-related costs and fees, including allocated
indirect costs, are subject to audits and adjustments by negotiation between the
Company and the U.S. Government.
In addition to the right to terminate, U.S. Government contracts are
conditioned upon the continuing availability of Congressional appropriations.
Congress usually appropriates funds on a fiscal year basis even though contract
performance may take several years. Consequently, at the outset of a major
program, the contract is usually incrementally funded and additional funds are
normally committed to the contract by the procuring agency as appropriations are
made by Congress for future fiscal years.
INTEGRATION OF ELDYNE/UNIDYNE/DCS OPERATIONS
In May 1996, the Company acquired Eldyne, Unidyne and DCS. These companies
provide the Department of Defense and other government customers with systems
research, development and prototyping, fleet integration, insertion of
technology into existing systems, control systems and life cycle support. The
integration of these businesses requires the dedication of management resources
which may detract from attention to the day-to-day business of the remainder of
the Company. In addition, the Company intends to seek to reduce expenses of the
10
<PAGE>
combined operations through consolidation of facilities and other expense
reductions. There can be no assurance, however, that the Company will be able to
reduce expenses or that there will not be material adverse effects relating to
the integration of these operations into the Company. See "Business--Defense
Systems--Recent Acquisitions."
POSSIBLE VOLATILITY OF TRADING PRICES; SHARES ELIGIBLE FOR FUTURE SALE
The trading prices of the Debentures and the Common Stock could be subject
to significant fluctuations in response to, among other factors, variations in
operating results, developments in the industries in which the Company does
business and general economic conditions. Such volatility may adversely affect
the market price of the Debentures and the Common Stock. The Company's future
operating results and Common Stock price may be subject to significant
volatility, particularly on a quarterly basis. Any shortfalls in operating
results from levels expected by the financial community could have an immediate
and significant adverse effect on the trading price of the Debentures and the
Common Stock in any given period.
In addition, sales of substantial amounts of Common Stock in the public
market following this Offering could adversely affect the trading prices of the
Debentures and the Common Stock. The Company filed a "shelf" registration
statement on Form S-3 on August 28, 1996 with the Commission which registers the
resale from time to time of 2,249,867 shares of Common Stock by certain
stockholders of the Company who were issued securities in the Company's May 1996
acquisitions of Eldyne and Unidyne. This "shelf" registration was declared
effective by the Commission on September 24, 1996. Under the terms of the
registration rights agreement between the Company and the holders of shares
included in the "shelf " registration, such shares may not be sold for 90 days
after the date of this Prospectus without the prior written consent of the
Underwriter. In addition, all of the other shares of Common Stock currently
outstanding are available for immediate sale in the public market, other than
shares beneficially owned by the Company's officers and directors which would
otherwise be available for immediate sale in the public market but may not be
sold until 180 days after the date of this Prospectus, without the prior written
consent of the Underwriter, under the terms of lock-up agreements between the
Underwriter and such officers and directors. There can be no assurance that
sales of Common Stock pursuant to the "shelf" registration statement or other
sales following this Offering will not adversely affect the trading prices of
the Debentures and the Common Stock.
RELIANCE ON KEY PERSONNEL
The Company's success depends in large part upon its ability to attract and
retain highly qualified technical and management personnel, including without
limitation, computer programmers proficient in the C++ language,
telecommunications engineers and technical and management personnel with the
high-level security clearances required for much of the Company's classified
work. Most of the Company's key personnel are not subject to employment or
noncompetition agreements. Competition for such personnel from other companies,
academic institutions, government entities and other organizations is intense.
There can be no assurance that the Company will be successful in hiring or
retaining such key personnel.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's results of operations are subject to considerable fluctuations
from quarter to quarter due to changes in demand for the Company's products or
services and other factors, and there can be no assurance that the Company will
be profitable in any particular quarter. Demand for the Company's products and
services in each of the markets it serves can vary significantly from quarter to
quarter due to revisions in budgets or schedules for customer projects requiring
the Company's products or services, changes in demand for the customers'
products which incorporate or utilize the Company's products or services and
other factors beyond the Company's control. In addition, demand for products in
the emerging broadband communications and commercial satellite businesses is
highly uncertain given the emerging nature of the Company's technology and other
established competing products and technologies.
COMPETITION
The industries and markets in which the Company competes are highly
competitive. The Company encounters intense competition in most of its business
areas from numerous other companies, many of which have far
11
<PAGE>
greater name recognition and financial, technological, marketing and customer
service resources than the Company. The Company's ability to compete in its
markets depends to a large extent on its ability to provide technologically
advanced products and services with shorter lead times at lower prices than its
competitors. See "Business--Competitive Conditions."
SUBORDINATION
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company, or in a bankruptcy, insolvency, receivership or
similar proceeding relating to the Company or its property, the payment of the
principal and interest on the Debentures will be subordinated to the prior
payment in full of all Senior Debt. No payment of principal or interest may be
made by the Company, directly or indirectly, on the Debentures at any time if a
default in payment of the principal or interest on Senior Debt exists, unless
and until such default shall have been cured or waived or shall have ceased to
exist. There are no restrictions in the Indenture upon the creation of
additional Senior Debt by the Company, or on the creation of any indebtedness by
the Company or any of its subsidiaries. As of September 30, 1996, the Company
had Senior Debt (excluding accrued interest) of approximately $29.7 million. See
"Description of Debentures--Subordination of Debentures."
A significant portion of the Company's operations is conducted through
subsidiaries. The rights of the Company and its creditors, including holders of
the Debentures, to participate in the assets of any such subsidiary upon any
liquidation or reorganization of such subsidiary or otherwise will be subject to
prior claims of creditors of such subsidiary, except to the extent that the
Company may itself be a creditor with recognized claims against the subsidiary.
At September 30, 1996, indebtedness of the Company's subsidiaries was
approximately $4.4 million ($3.0 million under a revolving bank line of credit
and $1.4 million in mortgage and equipment notes) and was secured by
substantially all the assets of three Company subsidiaries, Eldyne, Unidyne and
DCS. The Company has guaranteed up to $2.5 million of the indebtedness under
that facility. The Company's ability to pay principal and interest on the
Debentures may be dependent upon the payment to it of dividends, interest and
other amounts by its subsidiaries. The bank credit agreement under which the
$4.4 million indebtedness is outstanding currently prohibits Eldyne, Unidyne and
DCS from transferring funds to the Company.
LACK OF PUBLIC MARKET
There is currently no established market for the Debentures. Although the
Company has applied to list the Debentures on the NYSE, there can be no
assurance as to the liquidity of the market for the Debentures that may develop,
the ability of the holders to sell their Debentures or the prices at which
holders of the Debentures would be able to sell their Debentures. If a market
for the Debentures does develop, the Debentures may trade at a discount from
their initial public offering price, depending on prevailing interest rates, the
market for similar securities, the performance of the Company, the market price
of the Company's Common Stock and other factors. No assurance can be given as to
whether an active trading market will develop or be maintained for the
Debentures.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Debentures are expected
to be $28.3 million ($32.5 million if the Underwriter's over-allotment option is
exercised in full), after deducting the underwriting discounts and commissions
and the estimated offering expenses payable by the Company. Such net proceeds
will be used to repay borrowings under the Company's revolving lines of credit,
which borrowings have been made generally for working capital purposes and,
subject to compliance with the covenants contained therein, can be reborrowed at
any time. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources." At September 30, 1996,
such lines of credit bore annual interest rates of 8.7% (weighted average) and
8.2%, had outstanding balances of approximately $20.1 million and $3.0 million
and had maturity dates of May 1997 and December 1996, respectively. See
"Capitalization." The Company intends to use the remaining net proceeds for
working capital and other general corporate purposes, including possible
acquisitions and joint ventures.
Pending use of the proceeds for the purposes described above, the Company
intends to invest the net proceeds of this offering in high quality, short-term,
interest bearing or dividend-bearing instruments.
12
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the New York Stock Exchange under the symbol
"TTN." The following table sets forth the quarterly high and low closing sales
prices for the Common Stock on the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
First Quarter................................................................................. $ 8.00 $ 2.88
Second Quarter................................................................................ 6.88 4.75
Third Quarter................................................................................. 5.88 4.50
Fourth Quarter................................................................................ 6.38 4.50
YEAR ENDED DECEMBER 31, 1995
First Quarter................................................................................. 7.13 5.63
Second Quarter................................................................................ 9.38 6.25
Third Quarter................................................................................. 10.38 8.50
Fourth Quarter................................................................................ 9.63 6.63
YEAR ENDING DECEMBER 31, 1996
First Quarter................................................................................. 7.38 6.00
Second Quarter................................................................................ 7.13 5.50
Third Quarter................................................................................. 5.63 3.63
Fourth Quarter (through October 25, 1996)..................................................... 4.38 3.13
</TABLE>
On October 25, 1996 the closing price of the Common Stock on the NYSE was
$3.125. As of October 2, 1996 there were 3,430 record holders of the Common
Stock.
The Company has never declared or paid a cash dividend to holders of Common
Stock. The Company's Board of Directors presently intends to retain all earnings
for use in the Company's operations and does not expect to authorize cash
dividends on the Common Stock in the foreseeable future. Any payment of cash
dividends in the future will depend upon the Company's earnings, capital
requirements and other factors considered relevant by the Company's Board of
Directors. Certain of the Company's debt agreements restrict the amount of
dividends which may be paid by the Company.
13
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at June 30, 1996, and as adjusted as of such date to give effect to the
application of estimated net proceeds of $28.3 million from the sale by the
Company of the Debentures. See "Use of Proceeds." The information set forth
below should be read in conjunction with the Consolidated Financial Statements
and Notes thereto and with Management's Discussion and Analysis of Results of
Operations and Financial Condition.
<TABLE>
<CAPTION>
HISTORICAL AS ADJUSTED
JUNE 30, 1996 JUNE 30, 1996
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Lines of credit..................................................................... $ 18,586 $ --
Current portion of long-term debt................................................... 1,066 1,066
Note payable to shareholder......................................................... 1,000 1,000
------------- -------------
Total current debt................................................................ $ 20,652 $ 2,066
------------- -------------
------------- -------------
Convertible Subordinated Debentures due 2003........................................ $ -- $ 30,000
Other long-term debt................................................................ 6,634 6,634
Series B Cumulative Convertible Redeemable Preferred Stock; $3,000 liquidation
preference, 500,000 shares issued and outstanding.................................. 3,000 3,000
Stockholders' equity:
Preferred stock; $1.00 par value; $13,897 liquidation preference--2,500,000 shares
authorized, 694,872 Cumulative Convertible issued and outstanding................ 695 695
Common stock; $.01 par value--30,000,000 shares authorized, 17,115,389 issued and
outstanding...................................................................... 171 171
Capital in excess of par value.................................................... 43,328 43,328
Retained earnings................................................................. 8,192 8,192
Treasury stock (1,074,884 shares), at cost........................................ (3,297) (3,297)
------------- -------------
Total stockholders' equity...................................................... 49,089 49,089
------------- -------------
Total capitalization................................................................ $ 58,723 $ 88,723
------------- -------------
------------- -------------
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
The following selected financial data as of December 31, 1994 and 1995 and
for the years ended December 31, 1993, 1994 and 1995 have been derived from and
should be read in conjunction with the Company's audited financial statements
and related notes and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" included elsewhere herein. The selected
financial data as of December 31, 1991, 1992 and 1993 and for the years ended
December 31, 1991 and 1992 have been derived from audited financial statements
not included herein. The selected statement of operations data and other data
for the six months ended June 30, 1995 and 1996 and the selected balance sheet
data as of June 30, 1996 are taken or derived from unaudited financial
statements of the Company. In the opinion of management, such unaudited
financial statements include all normal recurring adjustments necessary for a
fair presentation of the results for such periods. The results of operations for
the six months ended June 30, 1996 are not necessarily indicative of the results
to be expected for the year ending December 31, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- --------------------
1991 1992 1993 (1) 1994 1995 1995 1996
--------- --------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 146,484 $ 148,762 $ 149,414 $ 136,206 $ 133,967 $ 64,472 $ 60,334
Gross profit..................................... 28,433 35,368 14,840 36,285 31,736 17,686 13,368
Selling, general and administrative expense...... 18,805 23,256 27,230 22,511 23,538 11,821 12,219
Research and development expense................. 3,915 4,004 2,257 5,339 5,904 3,475 2,379
Depreciation and amortization.................... 4,466 4,595 4,495 3,424 4,117 2,057 2,541
Restructuring and other (income) expense, net.... -- -- -- (1,200) 6,249 -- --
Operating profit (loss).......................... 5,713 8,108 (14,647) 9,635 (3,955) 2,390 (1,230)
Interest expense................................. 2,322 1,225 1,590 923 1,154 469 1,157
Interest income.................................. 143 84 84 291 95 43 18
Income tax provision (benefit)................... 175 823 (6,547) 3,050 (1,207) 710 (758)
Cumulative effect of change in accounting
principle....................................... -- -- 1,700 -- -- -- --
Equity in loss of investee (2)................... -- (2,513) -- -- -- -- --
Net income (loss)................................ 3,359 3,631 (7,906) 5,953 (3,807) 1,254 (1,611)
Dividend requirements on preferred stock......... 695 695 695 695 695 347 366
Net income (loss) applicable to common stock..... 2,664 2,936 (8,601) 5,258 (4,502) 907 (1,977)
Net income (loss) per average common share....... $ 0.25 $ 0.26 $ (0.73) $ 0.40 $ (0.33) $ 0.07 $ (0.14)
Average number of common shares outstanding...... 10,661 11,429 11,739 13,288 13,445 13,836 14,418
Ratio of earnings to fixed charges (3)........... 1.72 2.82 -- 3.87 -- 2.27 --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------- AS OF JUNE
1991 1992 1993 (1) 1994 1995 30, 1996
--------- --------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 188 $ 4,344 $ 5,374 $ 5,129 $ 5,833 $ 3,586
Working capital............................................ 34,000 38,552 19,238 21,439 19,875 15,292
Property and equipment, net................................ 8,195 6,901 9,689 12,932 18,295 21,022
Total assets............................................... 75,644 90,679 93,214 81,903 95,170 121,484
Total debt................................................. 10,500 16,650 18,192 1,321 14,500 27,286
Redeemable preferred stock................................. -- -- -- -- -- 3,000
Stockholders' equity....................................... 30,650 36,016 29,321 38,768 38,639 49,089
</TABLE>
- ------------------------
(1) During 1993, the Company was involved in a contractual dispute with the U.S.
Navy over its Mini-DAMA fixed-price development contract. That dispute had a
material adverse impact on the Company's revenues and gross margins and was
a principal cause of the Company's $7.9 million net loss for the year.
(2) Net income for 1992 includes equity in loss of investee of $2,513,
representing the Company's share of research and development, start-up costs
and certain other obligations of the Company resulting from its ownership
interest in a joint venture which was ultimately dissolved in 1993.
(3) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income before income taxes plus fixed
charges) by fixed charges. Fixed charges consist of interest expense
(including amortization of deferred financing costs) and the portion of
rental expense that is representative of an interest factor. For the years
ended December 31, 1993 and 1995 and the six months ended June 30, 1996,
earnings were insufficient to cover fixed charges by $16,153, $5,014 and
$2,369, respectively.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
Throughout 1995 and the first six months of 1996, Titan continued its
strategy of investing in its emerging commercial businesses. Investment dollars
were provided primarily by drawing upon the Company's bank line of credit and
through internally generated funds. The investments included, among other
things, the construction of the Titan Scan medical device sterilization facility
in San Diego, California, hardware and software development related to the
broadband communications and satellite communications businesses and increased
selling, marketing and research and development expenditures. Significant
accomplishments achieved by Titan's emerging commercial businesses included the
award of a $9.6 million rural telephony development contract in Indonesia, the
completion of a $2.0 million contract in Thailand to integrate a satellite
network and the award in July 1996 of a $4.0 million contract to provide another
satellite network to a different customer in Thailand, delivery of the first
products in the broadband communications business and the receipt in the second
quarter of 1996 of an additional $2.7 million contract in this business area,
and the sale of a turnkey medical device sterilization system in Austria. These
accomplishments marked significant progress for Titan. However, the need to
speed up product development and the commercialization process heightened the
challenge of internally funding these start-up activities. As a result,
management continued the process of critically examining Titan's long-term
operating and financing strategy.
In response, the Board of Directors adopted a strategy to reshape the
Company in order to make it more attractive to external funding sources within
the capital marketplace. A formal plan of restructuring was adopted which
redefined Titan's businesses into four business segments: Communications
Systems, Software Systems, Defense Systems and Emerging Technologies. As part of
this strategy, management has determined that the restructuring would require
dispositions of certain of Titan's businesses as well as significant
reorganizations of its Software Systems segment and sterilization business,
reductions of personnel, and other actions associated with reorganizing the
structure of the Company. A charge of approximately $5.4 million was recorded in
1995 to reflect these restructuring activities. In July 1996, in connection with
these restructuring activities, the Company sold its Electronics division.
The Company is currently involved in a number of developing commercial
businesses, most notably commercial satellite communications, broadband
communications, and medical device sterilization. Certain investments made in
these early stage ventures have been capitalized and are included in the balance
sheet, primarily within the captions of Property and Equipment, Other Assets
(which includes capitalized software costs) and Inventory (non-recurring
engineering). At June 30, 1996, these capitalized investments aggregate
approximately $15.4 million. These businesses are in various stages of
development and have not yet generated sufficient revenues to achieve
profitability. Management plans to continue to invest, primarily in the
Communications Systems segment, while at the same time carefully monitoring its
return on investment from all of its start-up ventures.
An essential element of the Company's long-term strategy is the growth
associated with its well-established Defense Systems segment. This segment
offers a variety of opportunities for Titan. Management intends to grow this
business by relying on Titan's proven technological capabilities and reputation
for performance. During 1995 and the first six months of 1996, achievements in
this segment included a $12.0 million award for initial production for Mini-DAMA
satellite communications terminals followed by the exercise of an additional
production option and other orders for Mini-DAMA terminals which aggregated over
$15.2 million, a contract under which the U.S. Navy may, at its option,
subscribe for up to $5.2 million of engineering services in the C(3)I area, and
a $2.8 million production order for satellite communication modems to be
installed in Motorola's LST-5 tactical radios.
On May 24, 1996, the Company completed the acquisition of three
privately-held businesses that were under common control, Eldyne, Unidyne and
DCS. The acquisitions have been accounted for as a purchase, and, accordingly,
the Company's consolidated financial statements include the operating results of
the three acquired companies since May 24, 1996.
RECENT OPERATING RESULTS
On October 17, 1996, the Company announced preliminary unaudited results for
the quarter and nine months ended September 30, 1996. The Company reported
revenues of $34,854,000 for the quarter ended
16
<PAGE>
September 30, 1996, compared to $34,983,000 for the same quarter in the prior
year. For the quarter, net loss was $1,969,000 or $.14 per share, as compared to
net income of $470,000 or $.02 per share for the third quarter of 1995. Revenues
for the nine months ended September 30, 1996 were $95,188,000 as compared to
$99,455,000 in the comparable year ago period. For the nine months ended
September 30, 1996, net loss was $3,580,000 or $.28 per share, as compared to
net income of $1,724,000 or $.09 per share for the same period in 1995.
Set forth below are certain selected consolidated financial data of the
Company, expressed as a percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................................. 90.1 73.4 76.3 72.6 77.8
------- ------- ------- ------- -------
Gross profit.................................................. 9.9 26.6 23.7 27.4 22.2
Selling, general and administrative expense................... 18.2 16.5 17.5 18.3 20.3
Research and development expense.............................. 1.5 3.9 4.4 5.4 3.9
Restructuring and other (income) expense, net................. 0.0 (0.9) 4.7 0.0 0.0
------- ------- ------- ------- -------
Operating profit (loss)....................................... (9.8) 7.1 (2.9) 3.7 (2.0)
Interest expense, net......................................... 1.0 0.5 0.8 0.7 1.9
------- ------- ------- ------- -------
Income (loss) before income taxes and cumulative effect of
change in accounting......................................... (10.8) 6.6 (3.7) 3.0 (3.9)
Income tax provision (benefit) and cumulative effect of change
in accounting................................................ (5.5) 2.2 (0.9) 1.1 (1.2)
------- ------- ------- ------- -------
Net income (loss)............................................. (5.3)% 4.4% (2.8)% 1.9% (2.7)%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
CONSOLIDATED RESULTS
Revenues for the six months ended June 30, 1995 and 1996 were $64,472,000
and $60,334,000, respectively. Revenue decreases in the six months ended June
30, 1996 were experienced in all segments except Defense Systems. The Company
reported a net loss of $1,611,000 for the first six months of 1996 compared to
net income of $1,254,000 for the first six months of 1995. This change from the
prior year period was due principally to the Company's continuing investment in
the commercial Communications Systems segment, the impact of reduced high-margin
revenue in the Company's commercial software business and additional costs
associated with the negotiated conclusion of certain programs with a major
customer in the Software Systems segment.
Selling, general and administrative expense ("SG&A") increased slightly in
the six months of 1996 compared to the same period in 1995. Increased sales and
marketing costs in the Company's commercial broadband communications business
were partially offset by decreased administrative costs resulting from
restructuring activities, primarily in the Software Systems business. Research
and development costs ("R&D") decreased from $3,475,000 for the six months of
1995 to $2,379,000 for the same period in 1996. Increased R&D efforts in the
Company's commercial broadband communications business were more than offset by
lower R&D costs in the Defense Systems segment.
Net interest expense increased $713,000 in the six months ended June 30,
1996 compared to the comparable period of 1995, due to increased borrowings and
higher interest rates under the Company's line of credit, increased interest on
the Company's deferred compensation plan and the loan agreement entered into in
December 1995 to finance machinery and equipment at the Company's new San Diego
medical sterilization facility. Average borrowings on the Company's line of
credit were $11,165,000 and $4,134,000 at weighted average interest rates of
7.9% and 7.0% in the six months ended June 30, 1996 and 1995, respectively.
17
<PAGE>
The income tax provision is a 32% effective rate in the first six months of
1996 compared to a 36% effective rate in the first six months of 1995. These
effective rates approximate the expected combined federal and state statutory
rates, less expected credits, primarily R&D credits.
BUSINESS SEGMENTS
COMMUNICATIONS SYSTEMS. The revenues for the Communications Systems segment
decreased $2,235,000 from $4,076,000 in the six months ended June 30, 1995 to
$1,841,000 in the six months ended June 30, 1996, due to the completion in the
first quarter of 1996 of the Company's initial order in the broadband
communications business area and the completion of the Company's satellite
communications contract in Thailand. The Company was awarded a $2.7 million
contract in the broadband communications business in the second quarter of 1996
for a system in Thailand, however, shipments on the contract have not yet
commenced. The Company made its first shipment on its $9.6 million rural
telephony contract in the second quarter of 1996. Segment operating loss
increased from $2,834,000 in the six months ended June 30, 1995 to $4,292,000 in
the six months ended June 30, 1996, principally due to the reduced sales volume
and the Company's continued planned investment in the digital television product
line, particularly accelerated sales and marketing efforts.
SOFTWARE SYSTEMS. The Software Systems segment revenues decreased
$7,648,000 from $18,328,000 in the six months ended June 30, 1995 to $10,680,000
in the six months ended June 30, 1996, principally due to a reduction of
revenues of $10,738,000 from a major telecommunications customer, partially
offset by growth of $3,429,000 in other custom software business. Operating
income decreased $4,938,000 from $5,072,000 in the six months ended June 30,
1995 to $134,000 in the six months ended June 30, 1996, resulting from the
impact of the loss of historically high-margin business, additional costs
associated with a negotiated conclusion of certain programs with this major
customer, and the absence of decreases in SG&A corresponding with the revenue
decreases. Although SG&A total costs decreased in dollars due to the effect of
cost-control measures and other restructuring activities implemented as revenues
decreased, SG&A costs increased as a percentage of revenues due to increased
efforts to diversify the business base.
DEFENSE SYSTEMS. The Defense Systems segment revenues increased $6,568,000
from $30,372,000 in the six months ended June 30, 1995 to $36,940,000 in the six
months ended June 30, 1996. Increased revenues from the acquisition of Eldyne,
Unidyne and DCS of $4,700,000 and increased 1996 revenues related to the
Mini-DAMA satellite terminal production contract were partially offset by
decreased revenues resulting from the wind-down of the work subcontracted to the
buyer of the Company's Applications Group (sold in April 1994). Segment
operating income increased $2,366,000 from $2,361,000 in the six months ended
June 30, 1995 to $4,727,000 in the six months ended June 30, 1996. This increase
was primarily due to non-recurring credits resulting from the reevaluation of
estimates of certain allowable contract costs based upon recent favorable
developments with certain government audit agencies, as well as changes in the
allowances on the carrying value of certain assets being disposed of. In
addition, operating income for the six months ended June 30, 1996 includes
$447,000 of operating income from acquired businesses and increased operating
income from the Mini-DAMA production contract.
EMERGING TECHNOLOGIES. The Emerging Technologies segment revenues decreased
$823,000 from $11,696,000 in the six months ended June 30, 1995 to $10,873,000
in the six months ended June 30, 1996, due to decreased revenues in the medical
sterilization business resulting from the completion of the Company's contract
to provide a turnkey medical device sterilization system in Austria and reduced
revenues in the government funded R&D business, partially offset by growth in
the environmental business. Segment operating income decreased $549,000 from
operating income of $282,000 in the six months ended June 30, 1995 to a loss of
$267,000 in the six months ended June 30, 1996, principally due to the reduced
sales volume and, to a lesser extent, due to start-up costs in the Company's San
Diego medical sterilization facility, partially offset by increased profit in
the environmental business.
YEARS ENDED 1993, 1994 AND 1995
CONSOLIDATED RESULTS
Titan's consolidated revenues were $149,414,000, $136,206,000 and
$133,967,000 in 1993, 1994 and 1995, respectively. Excluding revenues from
Titan's Applications Group, which was sold in April 1994, Titan's pro forma
1993-1995 revenues were $117,714,000, $124,293,000 and $133,967,000,
respectively, reflecting a compound
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<PAGE>
annual growth rate of 6.6%. This revenue growth was achieved primarily in the
Communications Systems and Software Systems segments, while the Defense Systems
segment, excluding the Applications Group, and Emerging Technologies segment
revenues were relatively stable over the three year period.
Titan's consolidated operating profit (loss) has been significantly impacted
by a number of factors in each of
the three years shown above. Combined selling, marketing, and research and
development expenses were $7,557,000, $9,686,000 and $12,008,000 in 1993, 1994
and 1995, respectively, reflecting Titan's efforts to expand commercial
applications of its technologies and to continue developing certain defense
communication technologies. General and administrative expenses decreased from
$18,164,000 in 1994 to $17,434,000 in 1995 after having been reduced
significantly from the 1993 level of $21,930,000. The decrease in 1994 resulted
from specific actions taken to reduce headcount as well as more selective bid
and proposal activity primarily in Titan's Defense Systems segment.
Restructuring charges were recorded in both 1994 and 1995 reflecting
management's efforts to adapt to both internal and external forces impacting
Titan's long-term operating strategy. The 1994 charge was offset by a
$12,700,000 pre-tax gain resulting from the sale of Titan's Applications Group.
Lastly, in 1993, operating profit was significantly impacted by the recording of
an increase in estimated cost at completion of approximately $9,950,000 on the
Company's Mini-DAMA fixed price development contract with the U.S. Navy.
Net interest expense has fluctuated significantly over the three year period
ended December 31, 1995. Generally, the principal component of interest expense
is the Company's borrowings under its bank line of credit. Borrowings from this
source averaged $14,200,000, $4,180,000 and $6,400,000 at weighted average
interest rates of 5.5%, 7.6% and 8.8% during 1993, 1994 and 1995, respectively.
Also affecting interest expense is interest on the Company's deferred
compensation and retiree medical obligations. Interest expense related to these
items was $441,000, $529,000 and $726,000 for 1993, 1994 and 1995, respectively.
Interest on the deferred compensation obligation will continue to increase as
the total obligation increases, while interest on the retiree medical obligation
is expected to decrease.
Income taxes reflect a benefit of $1,207,000 in 1995 or a 24% effective tax
rate. The difference between the actual provision and the expected provision
(based on the United States statutory tax rates applicable each year) is due to
the alternative minimum tax and to permanent differences between financial
statement income and taxable income. The provision for taxes in 1994 was
$3,050,000, or a 34% effective tax rate, while the benefit for taxes in 1993 was
$6,547,000 or a 41% effective rate. The differences between the actual effective
rate and the expected rate in both these years was largely due to the effects of
research credits and operating loss carry forwards. Also with respect to taxes,
in 1993 Titan recorded a $1,700,000 benefit representing the cumulative effect
of a change in accounting principal as a result of the Company's adoption of
SFAS No. 109 "Accounting for Income Taxes".
BUSINESS SEGMENTS
COMMUNICATIONS SYSTEMS. Revenues in the Communications Systems segment were
$6,492,000, $6,319,000 and $7,490,000 in 1993, 1994 and 1995, respectively. The
composition of the revenues was significantly different over the three year
period. Revenues in 1995 included approximately $2,400,000 of revenues from the
Company's first contract in the broadband communications business area. There
were no broadband communications revenues in 1994 or 1993. Revenues in the
satellite communications business unit were approximately $6,400,000, $6,000,000
and $5,100,000 in 1993, 1994 and 1995, respectively. However, in early 1995,
Titan sold its transceiver manufacturing division which was part of this
business unit. On a pro forma basis, excluding the sold division, this segment's
revenues were approximately $1,300,000, $2,500,000 and $7,000,000 in 1993, 1994
and 1995, respectively. The increase in pro forma revenues from 1994 to 1995
resulted from obtaining and performing a contract to develop and integrate a
satellite communications network in Thailand as well as from the addition of
broadband communications revenues previously mentioned. The change from 1993 to
1994 was primarily due to increased sales of voice digitizing cards.
The segment's operating loss was $4,488,000 in 1995 compared to $7,413,000
in 1993 and $7,927,000 in 1994. The loss in 1995 reflects the start-up nature of
this segment's businesses which require significant selling, marketing and
research and development activities disproportionate to the level of revenues
generated to date. Management intends to continue investing in these businesses
and, as a result, expects that significant losses will also be
19
<PAGE>
experienced in 1996. The loss in 1994 includes approximately $5,400,000 of
losses and restructuring charges associated with Titan exiting its transceiver
manufacturing business which was primarily responsible for this segment's 1993
operating loss.
SOFTWARE SYSTEMS. Revenues in the Software Systems segment were $13,713,000
in 1993, $28,868,000 in 1994 and $33,175,000 in 1995. One customer accounted for
approximately $24,000,000 of this segment's revenue in both 1994 and 1995, and
$9,700,000 in 1993. In the second half of 1995, this segment experienced reduced
demand from this customer. The 1995 revenue increase was generated from new
customers. As shown above, the increase from 1993 to 1994 resulted from
increased business with the one significant customer.
Segment operating margin (segment operating profit as a percentage of
segment revenues) was 21.6% in 1994 and 11.5% in 1995. The 1995 decrease was
principally due to the effect of restructuring charges for severance and other
reorganization costs and the impact of reduced sales volume from the one
previously mentioned customer. Segment operating margin was 6.7% in 1993. The
results for 1993 included losses on certain now completed fixed price contracts
which significantly lowered overall segment profitability.
DEFENSE SYSTEMS. Revenues in the Defense Systems segment were $103,071,000,
$78,780,000 and $67,948,000 for 1993, 1994 and 1995, respectively. However,
excluding revenues attributable to the Company's Applications Group, pro forma
segment revenues were $71,371,000, $66,867,000 and $67,948,000 for 1993, 1994
and 1995, respectively. The decrease from 1993 to 1994 was due to reduced
shipments in the Electronics division. Revenues in 1994 and 1995 included
approximately $9,700,000 and $18,300,000, respectively, for work subcontracted
to the buyer of the Applications Group. There was no operating profit associated
with these revenues. Furthermore, 1995 revenues and operating profit included
approximately $1,400,000 recovered from a termination for convenience claim with
the U.S. Government for work performed in prior years.
Segment operating margin for 1995 was 6.6%, compared with 6.0% in 1994. In
1993 there was an operating loss of $2,804,000. Operating results for 1994
include $2,500,000 of profit resulting from a favorable settlement and from
improved contract performance on the Company's Mini-DAMA fixed price development
contract. This profit was offset by a charge of approximately $3,200,000 for
restructuring this segment's Electronics division. The loss in 1993 was
primarily the result of recording an increase in estimated costs to complete the
Company's Mini-DAMA fixed price development contract which was the subject of a
contract dispute with the customer, the U.S. Navy.
EMERGING TECHNOLOGIES. Revenues in the Emerging Technologies segment were
$26,138,000, $22,239,000 and $25,354,000 in 1993, 1994 and 1995, respectively.
Approximately $7,400,000 of 1995 revenue was generated by the segment's start-up
businesses. Substantially all remaining revenue for all periods presented was
derived from the various established business lines. This segment's operating
profit (loss) has not been material in relation to Titan's consolidated
operating results. Generally losses experienced by the start-up operations have
offset profits contributed by the segment's other lines of business.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1996, Titan used $3,200,000 cash for
operating requirements. In addition to funding the net loss, other significant
cash uses included an increase in inventories of $3,315,000 related principally
to government satellite communications and commercial rural telephony products,
funding requirements for certain accrued compensation obligations of $2,999,000
and $2,269,000 of restructuring activities. Cash was provided primarily by
collection of certain large receivables in the Defense Systems segment and by
borrowings under the Company's line of credit and the refinancing of the
Company's Denver Scan facility, which provided $5,214,000 and $1,773,000,
respectively.
Borrowings under the Company's bank line of credit have been a principal
source of funding these operating requirements. As of June 30, 1996 the Company
had debt outstanding of $14,400,000 under a $17,000,000 bank line of credit. In
addition, the Company had commitments under letters of credit at June 30, 1996
of $355,000, which reduced availability under the line of credit to $2,245,000.
As of June 30, 1996, the Company was not in compliance with the covenants under
the line of credit which prohibited consecutive quarterly losses and required
the Company to maintain stipulated ratios of total liabilities to tangible net
worth and minimum interest coverage. The Company obtained a waiver from the bank
for these conditions as of June 30, 1996, subject to the bank's right to secure
the outstanding obligations under the line of credit with the Company's assets.
In September 1996, the
20
<PAGE>
Company entered into an amendment to the line of credit which increased the
maximum borrowing availability from $17,000,000 to $22,000,000. The borrowing
availability will decrease, however, to $14,000,000 on the earlier of (a)
January 1, 1997 or (b) the receipt by the Company of over $20,000,000 of new
capital from the sale of assets or issuance of subordinated debt (including the
Debentures offered hereby) or capital stock which would add to the Company's net
worth. Under the amendment, Titan and its wholly-owned subsidiary, TIS, granted
the bank a security interest in substantially all of their non-real property
assets, including accounts receivable, inventory, equipment and patents. In
addition, the Company pledged the stock of TIS, Eldyne and Unidyne to the bank
and agreed that if it has not received $20,000,000 in new capital by November
15, 1996 the Company would assign to the bank all rights to payment of monies
under its government contracts. The amendment also deleted or revised certain
financial covenants. The amended line of credit does, however, contain financial
covenants which require the Company to maintain stipulated levels of net worth,
a specified ratio of total liabilities to tangible net worth and a specified
quick ratio. The maturity date of the line of credit is May 30, 1997.
In connection with the Company's acquisition of Eldyne, Unidyne and DCS in
May 1996, the Company's Eldyne and Unidyne subsidiaries assumed and renegotiated
a separate credit agreement with Crestar Bank which provides, among other
things, for a working capital line of credit facility of up to $7,000,000 for
Eldyne and Unidyne. The actual borrowing base is limited for each of Eldyne and
Unidyne to the sum of various percentages of billed and certain unbilled
government and commercial receivables. The line of credit is secured by
substantially all of the assets of Eldyne, Unidyne and DCS. At June 30, 1996,
$4,186,000 was outstanding under this line of credit. This line of credit
agreement contains certain financial covenants that require each of Eldyne and
Unidyne to maintain stipulated levels of tangible net worth, working capital and
leverage. The line of credit requires that borrowings be used only for Eldyne
and Unidyne, and prohibits these entities and DCS from transferring funds to the
Company. Eldyne and Unidyne obtained a waiver from the bank, effective as of
June 30, 1996, with respect to violations of certain of these financial
covenants which existed as of June 30, 1996. The Company has guaranteed up to
$2,500,000 of indebtedness under this line of credit. The maturity date of the
line of credit is December 31, 1996.
Cash requirements for the remainder of 1996 are expected to continue to be
significant. The Company intends to continue its investment in the further
development of business ventures within the Communications Systems segment. To
finance this investment the Company is investigating a combination of
alternatives that include continued working capital management, utilization of
the remaining availability under the Company's bank line of credit ($1.3 million
of the current $22,000,000 of availability existed at September 30, 1996), and
new debt and equity sources, including the Debentures offered hereby. There can
be no assurance that the Company will be successful in obtaining such additional
funding. In such event, the Company would have to reassess its investment in its
start-up ventures.
21
<PAGE>
BUSINESS
Titan is a technology-rich company which provides sophisticated
communications and information systems products and services to large commercial
and government customers. Titan utilizes its core satellite and wireless
communications and large-scale software applications technology and expertise to
target rapidly growing markets.
In its communications business, Titan specializes in the development and
production of advanced satellite terminals, voice/data modems, networking
systems and other products used to provide reliable and secure communications
for a variety of voice, data and video applications. In the commercial
marketplace, Titan applies its defense-derived technology and expertise to
provide bandwidth efficient and cost-effective satellite earth stations for
telephony services in locations with little or no wired telephony
infrastructure. The Company's network management and satellite communications
expertise also permit it to develop systems for business users in geographically
dispersed locations. Titan also offers a conditional access system which
provides secure distribution of satellite, wireless or cable TV video
programming. The Company believes these commercial markets represent significant
opportunities for future growth. In the government area, the Company is a
leading provider of secure ultra high-frequency ("UHF") communications systems
to the U.S. military. In the current environment of limited resources and
multiplying defense requirements, the government is placing increasing reliance
on secure communications systems that allow forces to collect and assimilate
information and rapidly respond to hostile situations. Titan provides its
government customers modular, highly mobile communications systems which can be
deployed to any location worldwide.
The Company's information systems business provides systems design and
object-oriented software development services to assist commercial and
government customers to engineer new information systems or to re-engineer
existing information systems to facilitate the migration from legacy systems to
distributed computing environments often utilizing the Internet and/or an
intranet. These design activities involve implementing a distributed network
systems architecture that satisfies specific requirements while taking into
account existing hardware and software systems. Titan provides a complete
integrated system solution to a client's requirements using both commercial
hardware and software as well as custom or semi-custom Titan-developed software.
Titan's commercial businesses focus on the process re-engineering needs of the
telecommunications and, to a lesser extent, financial services industries. The
Company's government funded efforts focus on developing and implementing
enterprise-wide information networks for intelligence agencies, NATO and the
Federal Aviation Administration where it can capitalize on its extensive
knowledge of the customer's operations and specific needs.
In addition to the Company's core communications and information systems
businesses, Titan's technology and expertise permit it to bid for
externally-funded research and development projects in selected areas. These
projects generate technologies that Titan believes can create additional value
for the Company. Titan is exploiting these projects and its technologies by
developing new businesses and through licensing, joint venturing or sales to
third parties. For example, Titan has developed new businesses in medical
product sterilization and environmental services. See "Business--Emerging
Technologies."
Over the past three years, the Company has consummated several strategic
acquisitions and divestitures in furtherance of its strategy to exploit its
technology and expertise and to focus on its core businesses. The following
tables set forth the unaudited pro forma revenues and operating profit (in
millions) from the Company's core and other businesses for the periods shown.
The revenues and operating profit are reflected as if all Divested Businesses
(see note 4 below) as of the date of this Prospectus had been divested as of
January 1, 1993.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Core Businesses (1)....................................... $ 73.3 $ 78.9 $ 82.0 $ 41.4 $ 38.8
Other Businesses (2)...................................... 12.9 12.3 17.0 7.6 8.3
Funded Research and Development (3)....................... 11.8 8.0 6.6 4.1 2.8
Divested Businesses (4)................................... 51.4 37.0 28.4 11.4 10.4
--------- --------- --------- --------- ---------
$ 149.4 $ 136.2 $ 134.0 $ 64.5 $ 60.3
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
OPERATING PROFIT (LOSS)
<S> <C> <C> <C> <C> <C>
Core Businesses (1)....................................... $ (6.8) $ 10.4 $ 5.4 $ 4.8 $ (0.2)
Other Businesses (2)...................................... 0.1 (0.7) (0.4) (0.1) (0.2)
Funded Research and Development (3)....................... 1.2 0.4 0.2 0.4 0.2
Divested Businesses (4)................................... (2.7) (7.4) (1.5) (0.2) 0.7
Corporate (5)............................................. (6.4) 6.9 (7.7) (2.5) (1.7)
--------- --------- --------- --------- ---------
$ (14.6) $ 9.6 $ (4.0) $ 2.4 $ (1.2)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- -------------------
(1) Core Businesses is comprised of the Company's Defense Systems,
Communications Systems and Software
Systems segments, excluding Divested Businesses described below. The decline
in the Core Businesses revenues and operating income for the six months
ended June 30, 1996 compared with the corresponding period of 1995 was
principally due to continuing investment in the Company's commercial
Communications Systems segment and reduced Software Systems revenues from a
major telecommunication customer and costs associated with a negotiated
conclusion of certain programs with this customer, offset in part by the
results of Eldyne, Unidyne and DCS since their acquisition on May 24, 1996.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition."
(2) Other Businesses is comprised of the Company's medical products
sterilization business, environmental consulting business and businesses
involved in the design and manufacture of custom accelerators and pulsed
power systems, all of which are part of the Emerging Technologies segment.
(3) Funded Research and Development is comprised of the Company unit generally
involved in performing various government-sponsored research and development
contracts, which is part of the Emerging Technologies segment.
(4) Divested Businesses is comprised of businesses that have been sold or closed
as of the date of this Prospectus and revenues subcontracted to the buyer of
the Company's Applications Group, which was sold in April 1994.
(5) Corporate includes corporate general and administrative expenses, certain
corporate restructuring charges and gains or losses from the sale of
businesses. Corporate general and administrative expenses are generally
recoverable from contract revenues by allocation to operations.
COMPANY STRATEGY
The Company's strategy is to grow its communications and information systems
businesses by exploiting its technology base and expertise, expanding its
commercial and government customer base, and developing new products and
services to address the needs of these customers.
The key components of this strategy are:
FOCUS ON CORE COMMUNICATIONS AND INFORMATION SYSTEMS BUSINESSES. The
Company's strategy is to focus aggressively on communications and information
systems markets which it believes offer high growth potential and where the
Company believes it can differentiate its products or services. These markets
allow the Company to capitalize on its core technology and expertise in
satellite and wireless communications and large-scale software design,
development and integration. As the Company generates valuable technology or
business opportunities from its emerging technologies or funded research and
development efforts, it intends to pursue licensing, joint ventures or other
transactions to derive value for the Company.
LEVERAGE TECHNOLOGY AND EXPERTISE. The Company intends to leverage
technologies and expertise it has developed in conjunction with its defense and
government business to penetrate further its targeted commercial markets. For
example, the Company will continue to utilize its DAMA technology, originally
developed for defense communications applications, to expand its presence in
commercial satellite communications markets. In addition, Titan will continue to
exploit its client/server software expertise, originated from work for defense
and government information systems customers, to perform similar work for
commercial software customers.
23
<PAGE>
GROW COMMERCIAL BUSINESSES. The Company continually seeks and reviews
attractive commercial market opportunities within its core businesses. The
Company will pursue opportunities where it believes it can utilize its
technologies to develop differentiated products and services to address
significant market demands. When an opportunity is identified, the Company
recruits key management personnel with extensive commercial management and
marketing experience, operates the new business separate from its defense and
government businesses and provides management with direct equity incentives in
the new initiative. Application of this strategy has led to the Company's
current principal commercial businesses--satellite communications, client/server
software and broadband communications.
EXPAND DEFENSE AND GOVERNMENT BUSINESS IN KEY MARKETS. The Company's
defense and government business strategy is to focus on key markets where it can
exploit its communications and information systems technology base and
expertise. For example, the government is increasing its dependence upon secure
communications as a "force multiplier" for national defense needs. To address
this need and the government's shift toward an "off-the-shelf" procurement
approach, the Company intends to continue to utilize its DAMA and other
technologies coupled with selected investments to develop standardized satellite
communications products available for purchase by customers. In addition, the
Company intends to continue to address the government's need to migrate from
mainframe computer systems to distributed client/server networks. The Company
focuses on areas of the government where its knowledge of the customer's
information needs and operations provides a competitive advantage. The Company
intends to preserve and grow its position in government markets through early
identification of programs, support of government program offices in formulating
requirements, and incremental investments in research and development to develop
lower cost military products with shorter delivery times.
PURSUE SELECTED ACQUISITIONS AND STRATEGIC ALLIANCES. The Company
continually evaluates potential acquisitions of commercial and government
businesses, technologies or products which are complementary to the Company's
core communications and information systems businesses. Titan also is pursuing
strategic alliances with other industry participants in order to provide
additional financial, technological and/or marketing resources for the Company's
core businesses.
BUSINESS SEGMENTS
The Company is executing its strategy through four business segments which
bring Titan's unique capabilities to bear on the growing needs of its customer
base: Defense Systems, which includes defense communications and government
information systems; Communications Systems, the commercial satellite and
broadband communications businesses; Software Systems, the commercial
information systems business; and Emerging Technologies. The Defense Systems,
Communications Systems and Software Systems segments represent the Company's
core communications and information systems and services businesses. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" for a discussion of the financial reporting for the Company's four
business segments.
DEFENSE SYSTEMS
The Defense Systems segment provides its communications and information
systems solutions to government customers, primarily to the U.S. Department of
Defense and intelligence agencies, focusing on key areas of secure satellite
communications and information process reengineering using distributed computing
and client/server software. The Defense Communications unit specializes in the
development and production of advanced satellite terminals and associated
voice/data processing modems using DAMA technologies. The Government Information
Systems unit provides systems analysis and design, object-oriented software
development services and systems integration to government customers with large
data management needs.
DEFENSE COMMUNICATIONS. In order to respond effectively to ongoing and
emerging hostile situations worldwide and to compensate for reductions in
defense personnel and weapons platforms, U.S. and allied governments are
increasingly employing systems that act as "force multipliers." This strategy
includes utilization of communications solutions specifically tailored to the
needs of military and intelligence agencies that provide secure and reliable
transmission and receipt of voice and data in demanding environments. As a
result of this strategy, customers are continuing to spend significant amounts
on the procurement and utilization of advanced communications products and
systems.
24
<PAGE>
In addition to addressing the government's demand for advanced products,
companies that provide defense communications products must also respond to a
changing government procurement environment. Until recently, the government
generally obtained new products that were designed and developed under fixed
price development contracts which required the products to meet very rigorous
military specifications. The government has now shifted to a nondevelopment
procurement approach under which companies are encouraged to perform their own
research and development programs to have products readily available for
purchase and to incorporate commercial "off-the-shelf" components where feasible
in order to reduce costs. This new environment favors companies who can
anticipate government requirements, minimize time-to-market and effectively
execute internal development projects in order to have advanced products readily
available for purchase by customers.
The market demand for advanced communications products, together with shifts
in government procurement trends, have created opportunities for companies, like
Titan, that are positioned to quickly provide advanced technology solutions
based on commercial components. The Company has combined expertise gained under
government sponsored development projects and its own internal development
efforts to become a leader in a technology which enables efficient satellite
communications. Titan's Linkabit division was contracted by the U.S. Air Force
in 1987 to develop a satellite communications technique called DAMA. Titan has
subsequently been awarded more than $100 million in government funded
development projects related to this technology. The Company has enhanced this
position by investing significant resources in internal development projects to
create a variety of DAMA-based products which utilize commercial components.
These efforts have resulted in the Mini-DAMA (miniaturized demand assigned
multiple access) terminal used by the U.S. Navy, as well as other satellite
communications products based on DAMA technology.
DAMA technology utilizes a network control computer to dynamically and
automatically assign transmission slots to dozens of users in milliseconds. DAMA
architecture overcomes the limitations of existing technologies, including the
rigidity of the dedicated channels employed in time division multiple access
("TDMA") systems, which require that a manned network controller act as
timekeeper for the network. An alternative technology, code division multiple
access or "CDMA," is not compatible with UHF satellites and thus is not
available for use in military satellite communications applications.
Under DAMA, a channel is divided into segments of time, or "time slots,"
each of which can accommodate separate communications. DAMA allows system users
to request allocation of time slots for communications and a central control
computer dynamically and automatically assigns the time slots based on user data
rate, priority and availability. Any unused DAMA capacity is shared by all
users. When a user no longer requires communications access, the control system
dynamically reassigns the time slot to other users. DAMA increases system
efficiency up to eight-fold over TDMA systems by limiting the capacity loss
caused by intermittent use of preassigned channels.
DAMA is an increasingly important technology because satellite capacities
have become saturated by the increasing requirements of modern defense systems
and technological advances which have lowered the cost of ground terminals and
have increased the volume and type of information communicated over military
satellite channels. UHF satellite systems that originally may have transmitted
only low-speed message traffic to relatively few users are now required to
transmit voice and high-speed encrypted data to thousands of users. Increases in
the number of satellite channels have not kept pace with these increases in user
demand. Accordingly, users can be accommodated only through more efficient use
of available frequencies in order to provide additional system capacity.
In recognition of the significant efficiency benefits offered by DAMA
technology, the Joint Chiefs of Staff have mandated that all UHF satellite
communications users have terminals capable of DAMA operation. Virtually all
U.S. forces and U.S. allies are upgrading or procuring new UHF DAMA satellite
terminals. While DAMA is initially being applied to the UHF satellite frequency
band, other frequency bands such as Super High Frequency and Extremely High
Frequency will soon transition to DAMA as well. During the past three years,
commercial satellite terminal users have also realized the potential savings
available by sharing channels with others and paying only for actual usage time.
See "--Communications Systems--Satellite Communications."
Titan specializes in the development and production of advanced satellite
terminals and associated voice/data processing modems incorporating DAMA
technology. The Company's modular, highly mobile systems can be deployed to any
location, providing reliable, secure communications worldwide. Titan has now
adopted a DAMA
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terminal design architecture which makes use of advanced digital technologies
employing industry-standard, modular, building-block designs to insure parts
availability, growth and low life-cycle costs. The Company now offers a line of
satellite communication products which are based on this modular architecture.
These products include:
MINI-DAMA UHF SATCOM TERMINAL. The Mini-DAMA terminal is a UHF
satellite communications terminal that miniaturizes the communications
capabilities formerly housed in two six-foot high racks into a single
twenty-inch high terminal. The Mini-DAMA terminal provides a weight savings
of over 500 pounds and a power savings of approximately 2800 watts compared
to prior systems. The terminal's small size permits aircraft, submarines and
small ships for the first time to enter the critical UHF satellite
communications command and control networks and transmit secure voice and
data communications. In addition, the Mini-DAMA terminal employs a modular,
open systems architecture which allows it to incorporate cards for multiple
UHF channels while leaving space for embedded encryption devices and other
growth options.
Initial work on the Mini-DAMA terminal was performed under a development
contract from the U.S. Navy. The Company also funded internal development
work to transition the terminal design into an open systems architecture,
incorporating commercial components. This work led to the Company being
awarded a $12.0 million initial production contract in January 1995 for
Mini-DAMA terminals from the U.S. Navy's Space and Naval Warfare Systems
Command. In April 1996, the U.S. Navy exercised an additional $8.3 million
production option under the contract and through July 1996, the Company
received additional orders from the U.S. Navy and an independent defense
systems contractor which aggregated $6.9 million. The Mini-DAMA contract
also includes over $60 million of remaining priced options which the Navy
may exercise in 1996 and 1997. Allied governments have also expressed
significant interest in the Mini-DAMA terminal due to the need to coordinate
secure satellite communications with U.S. Armed Forces. The Company has
already received initial orders from customers in the United Kingdom and
Norway.
LST-5D UHF DATA MODEM. The LST-5 is a lightweight, compact UHF SATCOM
terminal produced by Motorola Corporation with over 5,000 units in service
with U.S. military organizations. Under the Joint Chiefs of Staff mandate
that all UHF satellite communications users have DAMA capability, these
LST-5 terminals must be upgraded to have DAMA capability or be replaced.
Under a strategic alliance with Motorola Corporation, Titan developed a UHF
DAMA modem, featuring embedded encryption devices for both voice and data
communications, which adds DAMA capability to the LST-5 terminal, renamed
the LST-5D. The Company has commenced deliveries under an initial order from
Motorola for 400 UHF DAMA modems.
LSM-1000 UHF SATCOM MODEM. The LSM-1000 is a miniaturized UHF satellite
modem with full DAMA capability which allows U.S. military users to select
from a variety of operational modes. The LSM-1000 also is designed to allow
for the addition of encryption, global positioning systems, video
compression and other capabilities. The Company believes that it is able to
price the LSM-1000 below competitive products because of design efficiencies
and the use of industry-standard components. The Company has contracts for
initial deliveries of over 50 LSM-1000 modems. The LSM 1000 has been
submitted for, and will be available for delivery upon completion of, final
certification by the U.S. government.
LST-8000 PORTABLE TRI-BAND SATCOM TERMINAL. The LST-8000 is a portable
terminal system which allows communications over C, X and Ku-band
satellites. The LST-8000 disassembles into six transit cases for vehicular,
helicopter or aircraft transport worldwide. The terminal operates at
high-data rates and its frequency diversity allows the military to
communicate through either defense or commercial satellites. The Company has
received a contract from the U.S. Army for the production of four LST-8000
terminals.
GOVERNMENT INFORMATION SYSTEMS. The U.S. federal government is the largest
single buyer of information systems and services in the world. The government's
focus on information systems reflects the critical role that those systems play
both in national security and in improving government efficiency. Changes in the
world political environment, coupled with technological advances, have created
new demands for secure information and data management systems that operate in
distributed client/server networks in support of national defense requirements.
In conflict situations, it is imperative that military or intelligence personnel
in geographically dispersed locations
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have access to common databases in order to determine and coordinate appropriate
action. In addition, government agencies are under increasing political pressure
to downsize and at the same time to improve service to constituents.
The Company provides information systems solutions to government customers
with large data management and control requirements. The Company's services
include systems analysis and design, object-oriented software development
services and systems integration. The Company focuses on marketing its services
to intelligence agencies, NATO and other government agencies where the Company
has extensive knowledge of the enterprise's operations and information systems
needs. This knowledge assists the Company in providing a comprehensive solution
to a customer's problem which is compatible with the customer's overall
information systems architecture and strategy, as opposed to developing merely a
technical solution to a specific problem. Titan believes that its knowledge of
specific customer demands and systems helps to differentiate the Company from
its competitors, and fosters follow-on business with customers seeking to
capitalize on the Company's familiarity with their operations.
Titan's initial work generally involves a thorough analysis of the
customer's enterprise structure and processes and information system needs. Once
this strategic analysis is completed, Titan designs the technology solution to
meet the customer's needs. This process typically involves software development
by the Company, coupled with integration of commercial "off-the-shelf" software
and hardware as available. On many procurements the Company will team with other
industry participants in order to offer a multi-company solution to the
customer. Under Titan's rapid application development approach, prototypes and
proof-of-concept systems are built and delivered to the customer early in the
development cycle. This approach allows the customer to obtain early validation
of system benefits and requirements, and system design changes may be more
easily incorporated with this approach.
Examples of the Company's government information systems work include the
following:
MILITARY INFORMATION SYSTEMS. Titan's recent work with the intelligence
community involved developing a prototype of a classified information system
within a six month period which has now been accepted by the user after
extensive field testing. This system provides a military commander contact with
and control of resources which provide timely information on specific areas of
interest. The Company believes that the system now brings significant
opportunity for additional development work to Titan.
NATO INFORMATION SYSTEMS. Titan designed and delivered an integrated secure
communications and information system to NATO for automated support of
intelligence sites throughout Europe. This program evolved from process
development to a system prototype delivered to the NATO user, followed by a
successful deployment to key military locations. The Company believes the unique
approach taken by Titan has ensured NATO of a more robust, flexible system at
much lower costs than originally envisioned.
DEFENSE INTELLIGENCE AGENCY MANAGEMENT TOOL. Titan designed and developed
its Collection Requirements Management Application ("CRMA") program which
automatically collects, links and transmits messages between military users and
intelligence centers in real time. CRMA is the Defense Intelligence Agency's
most widely used management tool for military users and is now operational in
over 50 sites worldwide.
The Company's software capabilities and knowledge of the needs of government
agencies also generate opportunities to provide on-line, computer based training
for a variety of programs for government clients. The Company has developed
multi-platform training modules consisting of linked hypertext documents in a
multimedia format (text, audio, video clips and animation) that provide highly
interactive training and testing.
RECENT ACQUISITIONS. In May 1996, the Company acquired Eldyne, Unidyne and
DCS (the "Acquired Companies"). The Acquired Companies provide the Department of
Defense and other government customers with systems research, development and
prototyping, integration and life cycle support of electronic, information and
control systems.
The Acquired Companies, with revenues of $55.6 million for the eleven months
ended June 30, 1996, now operate as wholly-owned subsidiaries of the Company
within its Defense Systems segment. Over the past several years, defense
spending for major new weapons systems and manpower has decreased, in favor of
spending more to increase the capability and functionality of existing systems.
This shift has created opportunities for the Acquired Companies. In particular,
Eldyne provides engineering, assembly and installation services for
communications,
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sonar and navigation systems. These services include designing digital
communications hardware and software, planning and managing U.S. Navy programs,
designing high-speed data acquisition and process control software, researching
electromagnetic interference and control, performing communications hardware
integration, testing and evaluating prototype shipboard electronic systems, and
performing complex computer simulations of magnetic and electrical fields.
Unidyne, which now is managed with DCS, provides its customers with a variety of
technical support services, including electronics and mechanical design,
computer-aided drafting and computer-aided manufacturing services, technical
documentation, prototyping, electronics and mechanical fabrication and various
industrial activities such as equipment installation, overhaul/refurbishment and
providing skilled trades personnel.
COMMUNICATIONS SYSTEMS
The Communications Systems segment contains two business units, both
targeting commercial markets which the Company believes offer high growth
potential.
SATELLITE COMMUNICATIONS. Many regions of the world remain without adequate
telecommunications infrastructure. According to industry sources, only 23% of
the world's population accounts for over 95% of the installed telephone base,
and 50% of the world's population has never made a telephone call. In 1995,
there were only 1.55, 1.68 and 4.69 subscriber lines in service per 100
inhabitants in Indonesia, the Philippines and Thailand, respectively, compared
to 62.71 in the United States. Growth in the market for rural telephony has
recently accelerated as a result of significant public and private investment in
basic telephony infrastructure, due in part to the recognition of the importance
of telecommunications infrastructure to economic advancement. Other factors
which are fueling the demand for rural telephony are deregulation and
privatization of telecommunications and increasing per capita income.
The transmission alternatives available to provide rural telephony services
include wired, wireless and satellite networks. Wired networks in many cases are
not feasible for rural telephony applications due to high installation costs,
difficult terrain and harsh climates. Wireless systems, and in particular
microwave radio networks, are currently the most common rural telephony
solution, but these systems are subject to line-of-sight limitations, require a
large number of microwave towers (one approximately every 20 to 50 kilometers)
and compete with other users for radio frequency spectrum. Satellite
communications, however, provide a means for the rapid development of
communications infrastructure in rural areas. Due to the broadcast nature of
satellite networks, transmission costs are not affected by the distance signals
must travel. Satellite networks are relatively easy to reconfigure or expand,
and can be located almost anywhere.
The Company's commercial satellite communications unit develops and sells
bandwidth-efficient, cost-effective satellite earth station networks and related
systems which address the demand for telephony services. Some of these products
include high-efficiency network management systems and voice processing and
redundant control circuitry for reliable transmissions. A key feature of the
Company's products is its defense-derived DAMALink-TM- network management
software system, which allows for multiple simultaneous users to access
efficiently the same satellite channel, resulting in cost savings and improved
operational flexibility for the customer. See "--Defense Systems--Defense
Communications."
To address the need for telecommunications infrastructure in developing
countries, the Company has designed and developed its Xpress Connection-TM-
system as a cost-effective means to link remote locations into the public
switched network in developing countries. Xpress Connection is a small (1.2
meter parabolic antenna, as opposed to the minimum 1.8 meter diameter dish
required by existing VSATs) low-cost satellite earth station, incorporating DAMA
and digital signal processing technologies while limiting power consumption to
30 watts, which allows for solar power operation. The terminal is designed to
operate on the extended C-band frequency and provide voice, data and facsimile
service. The Company believes that this terminal can be successfully used
because the extended C-band frequency is subject to less interference because of
fewer adjacent satellites using this frequency in comparison to standard C-band
frequency. The Company believes that, as a result of its smaller dish size
requirements and innovative design, the Xpress Connection terminals will cost
significantly less than other VSATs currently available.
In September 1995, the Company received an approximately $9.6 million
contract from Pasifik Satelit Nusantara ("PSN") to provide the Xpress Connection
system for use in a rural telephony system being developed in Indonesia.
Delivery of certain components of the Xpress Connection system was made in June
1996. Delivery of the
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terminals for the system will commence upon successful completion of final
testing of the system under the terms of the contract. In September 1996, the
contract was amended to add Tedco Group Limited, a Singapore company ("Tedco"),
as a party. Under the revised contract, PSN and Tedco will divide responsibility
for purchasing the Xpress Connection system from the Company. The contract also
includes options for PSN and Tedco to purchase additional terminals and other
equipment. PSN will initially market the Xpress Connection through government-
licensed satellite service distributors to businesses that require low-cost,
private-use, dedicated voice, fax and data communications services. Under this
contract, PSN and Tedco have the exclusive right to market and sell the Xpress
Connection for use in Indonesia and jointly with Titan in the remainder of the
Asian Palapa C1 and C2 satellites' coverage area.
The Company's satellite communications products also have application to
corporations desiring to link dispersed offices where alternative communications
systems are not available. In July 1996, building on a previous $2.0 million
contract with Loxley Public Company in Bangkok, Thailand, the Company received
an approximately $4.0 million contract from United Communication Industry Public
Company Limited in Bangkok to provide elements of a turnkey voice, data and
facsimile communications network for The Bank for Agriculture and Agricultural
Cooperatives. Under the contract, the Company will provide the DAMALink network
management system and satellite communications components for main branch and
rural banks utilizing technology developed for the Xpress Connection system.
The Company also offers a system which digitizes voice signals, called the
MRVC. The MRVC, or multiple rate voice card, handles voice compression,
multiplexing and echo cancellation--all in one circuit card--for satellite
communications. Titan has sold over 1,000 MRVCs for use in commercial,
government and defense applications. In satellite applications which require
reception of intermittent or burst transmissions, such as in DAMA operations,
the Company offers a channel control modem. The modem reduces call set-up times
and the required amount of control bandwidth for call processing.
BROADBAND COMMUNICATIONS. Over the next several years, worldwide demand for
pay television services is expected to increase due to the growing availability
of multi-channel television services and broadcast delivery service in areas
which lack the infrastructure for wired cable television, such as rural areas
and emerging markets. For example, according to industry sources, by the year
2000 the penetration rate of multichannel services in the Asia-Pacific region is
expected to grow from 15% to 27%, or a total of 120.0 million subscribers. The
total number of multichannel subscribers in Eastern Europe is expected to grow
from 13.7 million in 1995 to over 35.8 million in 2005. The number of
multichannel subscribers in Western Europe is expected to grow from 53.4 million
in 1995 to over 86.0 million in 2005. In addition, in densely populated areas of
developed countries, wireless cable technology provides a lower-cost entry
strategy for operators who want to establish rapidly a presence in under-served
markets without incurring the substantial cost and time of building traditional
wireline cable infrastructure.
Demand for pay television services also has been stimulated by the
proliferation of various wireless and satellite delivery systems. These systems
include wireless cable, consisting of local multipoint distribution services
(LMDS) and multi-channel multipoint distribution services (MMDS), as well as
direct-to-home (DTH) satellite broadcast services and other private and business
television satellite networks. No matter which transmission medium is used, all
systems require conditional access equipment to provide essential system
security, minimizing unauthorized access and piracy of the operator's
transmission signal and thereby maximizing subscriber revenues. Conditional
access equipment also provides the pay television operator necessary flexibility
in providing selective programming, pay-per-view events and custom programming
packages for consumers.
Titan's Broadband Communications unit specializes in providing complete
turnkey security for television delivery systems, with applications for delivery
of television programming via wireless, satellite, coaxial cable and fiber
optics. This unit also provides systems integration services to broadcast
systems operators. The unit was formed to commercialize key patents (which are
co-owned with General Instrument Corporation) and other intellectual property
rights which were originally developed or acquired by Titan's Linkabit division,
along with additional conditional access and signal encryption technology
developed by the Company following its acquisition of Linkabit. Titan's secure
delivery system, the Video PassPort-Registered Trademark- conditional access
system, allows a pay television operator to selectively authorize and/or
deauthorize users for access to video and audio information. Key components of
the Video PassPort system include a subscription authorization system,
pay-per-view authorization system,
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access control module, set-top decoder firmware and "smart-card" security. The
Video Passport system has been designed with an open system architecture which
enables it to function effectively with a broad range of multi-channel delivery
systems and components. Unlike conditional access systems offered by certain
vertically integrated competitors, the Company's open architecture system allows
system operators to select set-top box vendors on a competitive basis,
independent of the conditional access system.
In January 1995, Titan signed an equipment purchase agreement with
CellularVision Technologies and Telecommunications ("CT&T") for delivery of
analog equipment and software to control access to a wireless LMDS television
service in New York City operated by CellularVision USA ("CellularVision"), an
affiliate and licensee of CT&T. The Company's system has been in operation in a
CellularVision field-test in Brighton Beach, New York during the past year. The
Company believes that CellularVision will use the Video PassPort system if it
expands its operations to additional markets. The equipment purchase agreement
provides that CT&T will designate the Company as an approved vendor and that the
Company will not sell equipment to any other person operating a cellular pay
television system at frequencies above 12 GHz other than CT&T and its licensees.
In addition, CT&T has licensed other companies to use its technology for
LMDS systems in several countries. In the second quarter of 1996, the Company
received an additional order from CT&T to provide equipment to a CT&T licensee
for an LMDS system in Bangkok, Thailand. Delivery of the equipment is expected
to commence in the fourth quarter of 1996.
The Company is making enhancements to its existing analog conditional access
system to provide added capabilities, features and improved security. The
Company also is currently making significant investments in adapting its analog
system for use in digital video transmission systems in order to address the
digital wireless, direct-to-home satellite and private and business television
markets. The digital Video PassPort incorporates a number of important
enhancements, including compatibility with the MPEG-2 and Digital Video
Broadcast (DVB) international standards.
SOFTWARE SYSTEMS
Commercial organizations in many industries worldwide, including
telecommunications and finance, are facing increasing global competition,
forcing them to increase employee productivity through more effective
utilization of information. At the same time, competitive pressures have forced
companies to respond more quickly to shorter technology cycles in order to
develop new products and improve customer service. This demand for greater
efficiency and service has driven companies to re-engineer and improve their
business processes. This transformation places a heavy burden on internal
management information systems departments to change older software programs
running on mainframe computers, often referred to as "legacy systems," to meet
the new information demands of the business. Companies are increasingly turning
to outside sources to assist them in the transition to client/server
environments under which the user as the "client" has direct, on-line access to
data and applications on one or multiple "servers." This open architecture
brings new capabilities for collecting, processing and displaying information
and allows organizations to respond rapidly to new information needs in the
changing global marketplace. This trend has created a demand for software
development organizations skilled in business process re-engineering and the
application of client/server technologies.
Titan provides custom software products and services for large corporate
clients moving from older mainframe systems to distributed computing systems
utilizing client/server, object-oriented software. Titan provides the services
and resources necessary to design, develop and implement these projects,
including systems consulting, project management, work-flow analysis, industry
and application knowledge, implementation, training and program maintenance.
Titan has technical expertise in all facets of systems solutions, including
equipment, databases, design, programming and testing. Titan has an extensive
library of client/server software modules from prior projects which it leverages
in current and future projects, increasing the Company's efficiency and
performance in these development projects.
To date, Titan's commercial software work has focused principally on the
telecommunications industry, having performed work for several large companies
in that industry. The Company's work has included development and support for
access carrier client/server applications, system-to-system communications for
the real-time exchange of
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maintenance information between an access customer and long-distance providers,
real time customer support applications, new client/server data management
architectures and improved trouble shooting and reporting for telecommunications
systems.
The Company's principal commercial software customer has been a major
telecommunications company. The Company's commercial software business has been,
and for at least the near future will be, dependent upon work from this
customer. Revenues from this customer were approximately $9.7 million, $24.3
million, $24.5 million and $4.9 million in 1993, 1994, 1995 and the six months
ended June 30, 1996, respectively. The Company began to experience reduced
demand from this customer during the second half of 1995 and this trend
continued during the six months ended June 30, 1996. The Company believes that
this reduced demand resulted primarily from the customer's reassessment of its
overall business process reengineering program. The customer also expressed
concerns about the quality of work performed on certain projects, which the
Company believes were related to the Company rapidly expanding to meet this
customer's increasing demand. The Company believes that it has addressed these
concerns, and the Company remains on this customer's list of approved vendors.
In addition, the Company has now completed major portions of existing work for
this customer which contributed to the trend of declining revenues. The Company
continues to do a significant amount of work for this customer and is now
actively seeking to build on its work for this customer to obtain additional
clients in telecommunications and other industries.
The Company has also been selected to develop and implement enterprise-wide
information networks for the Federal Aviation Administration ("FAA"). Titan's
initial work for the FAA encompassed one process re-engineering program, and
subsequently has expanded to include five development programs, including the
Executive Information System for FAA Decision Management Control. The Executive
Information System is a prototype now being used at the FAA's Airways Facilities
headquarters that provides management with user-friendly access to information
in key areas of budget, personnel, system status and strategic plan status from
geographically dispersed FAA databases.
Titan also is providing information services activities under a $2.6 million
contract with a major commercial bank. This work includes process re-engineering
and development for network management, ATM and financial management systems.
The Company has recently established a four person sales and marketing team
whose objective is to reduce the Company's dependence on revenues from a few
major customers in its commercial software systems business. The Company
believes that its competitive strengths include its detailed knowledge of the
operations and business needs of telecommunications and other customers, expert
and responsive project teams and senior management experience. In addition, the
Company has developed its Protocycling-TM- approach to system design and
implementation in which small teams of Company software developers and customer
representatives work closely to define the customer's initial product
requirements and then to review and refine the system through iterative
development cycles. The Company believes that its Protocycling approach results
in well-documented software and shorter overall development time and minimizes
the need to make expensive changes late in the development cycle.
The Company's commercial software business has over 150 personnel and
systems programmers highly skilled in object-oriented technologies, including
C++, and standards-based software development environments. The Company operates
from four development centers located near principal customers across the United
States. The centers are linked by a high-speed wide area network which permits
software specialists who may be located in different centers to work
cooperatively on the same development project.
EMERGING TECHNOLOGIES
The Emerging Technologies segment contains early-stage commercial
businesses, including medical product sterilization and environmental
consulting, together with established businesses generally involved in
Department of Defense (DoD) funded research and development contracts. The
Company's strategy is to cultivate the funded research and development
activities as a source of additional commercial or DoD products, systems or
services.
MEDICAL STERILIZATION SYSTEMS. The current market for medical product
sterilization systems is dominated by two technologies--cobalt-60 radioisotope
systems, which sterilize through the use of radiation, and ethylene oxide
systems, which sterilize through the use of a hazardous gas. The Company
believes that these technologies present
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potential health risks and environmental complications due to the hazardous
substances used in these procedures. The Titan Scan division was formed to
address the need for an environmentally sound sterilization system for
disposable medical products. Titan Scan applies the Company's advanced linear
accelerator technology to the sterilization of medical products. Titan Scan
believes its SureBeam-Registered Trademark- irradiation sterilization process
offers a reliable, environmentally acceptable and efficient alternative to
traditional cobalt-60 radioisotope or ethylene oxide systems.
Titan Scan provides sterilization services and systems to the medical device
marketplace in two principal ways: (i) its owner-operated facilities; and (ii)
sales and installations of turnkey sterilization systems. Titan Scan owns and
operates two facilities to provide contract sterilization services to medical
device manufacturers. The Company's first facility commenced operation in July
1993 in Denver, Colorado and is now operating at nearly full capacity. Titan
Scan also opened a second facility in San Diego, California in January 1996 and
has secured a five-year contract with IMED Corporation as anchor customer for
the facility. In June 1995, the Company sold its first turnkey sterilization
system to BSE-Mediscan in Kremsmunster, Austria and is aggressively pursuing
additional turnkey opportunities.
ENVIRONMENTAL CONSULTING. Major industrial companies in the mining,
petroleum, chemical and electronics industries are seeking outside assistance in
managing and minimizing the costs of their environmental remediation efforts.
Titan Environmental Corporation ("TEC"), a subsidiary of the Company,
specializes in providing professional environmental consulting and engineering
services to these industrial customers. TEC employs approximately 40 people,
consisting primarily of consulting engineers, environmental scientists and
remediation managers. TEC's capabilities include remediation strategy
development, site assessment, risk assessment, remediation technology selection,
contract management and oversight of regulatory agency approvals. In particular,
TEC focuses on the development of comprehensive solutions to groundwater
contamination problems.
FUNDED RESEARCH & DEVELOPMENT. Titan performs various government-sponsored
research and development projects, primarily comprised of cost-reimbursable
contracts. These research and development activities involve a number of
technologies including those necessary to develop and manufacture high-powered
microwave tubes.
OTHER BUSINESSES. Titan also designs and manufactures custom particle
accelerators and pulsed power systems. These systems include linear electron
accelerators for applications including medical product sterilization and basic
research. These products are sold domestically and internationally to both
government and industrial customers.
GOVERNMENT CONTRACTS
Sales to the United States Government, including both defense and
non-defense agencies, and sales as a subcontractor as well as direct sales,
aggregated $112.0 million, $93.1 million, $81.6 million and $41.2 million in
1993, 1994, 1995 and the six months ended June 30, 1996, respectively. These
amounts represented 75%, 68%, 61% and 68% of total revenues in 1993, 1994, 1995
and the six months ended June 30, 1996, respectively.
Titan's Government customers include the Navy, Army, Air Force, and other
Government agencies, including the FAA, Federal Emergency Management Agency, the
Department of Commerce, the National Aeronautics and Space Administration, the
Defense Nuclear Agency and others. The Company's business is dependent to a
large extent upon continued funding from these and other government agencies.
The Company's contracts with the Government and its subcontracts with
government prime contractors are subject to termination for the convenience of
the Government; termination, reduction, or modification in the event of change
in the Government's requirements or budgetary constraints; and, when the Company
participates as a subcontractor, the failure or inability of the prime
contractor to perform its prime contract. In addition, the Company's contract
costs and fees, including allocated indirect costs, are subject to audits and
adjustments by negotiation between the Company and the Government.
In addition to the right to terminate, Government contracts are conditioned
upon the continuing availability of Congressional appropriations. Congress
usually appropriates funds on a fiscal year basis even though contract
performance may take several years. Consequently, at the outset of a major
program, the contract is usually incrementally funded and additional funds are
normally committed to the contract by the procuring agency as appropriations are
made by Congress for future fiscal years.
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The Company's business with the Government and prime contractors is
performed under cost reimbursement, time and materials or fixed price contracts.
Cost reimbursement contracts for the Government provide for reimbursement of
costs plus the payment of a fee. Under time and materials contracts, the Company
is reimbursed for labor hours at negotiated hourly billing rates and is
reimbursed for travel and other direct expenses at actual costs plus applied
general and administrative expense. Under fixed price contracts, the Company
agrees to perform certain work for a fixed price.
The following table gives the percentage of revenues realized by the Company
from the three primary types of Government contracts during the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
CONTRACT TYPE 1993 1994 1995 JUNE 30, 1996
- -------------------------------------------------- --------- --------- --------- -------------------
<S> <C> <C> <C> <C>
Cost Reimbursement................................ 62.7% 59.9% 54.7% 45.9%
Time and Materials................................ 1.8 3.3 5.1 2.5
Fixed Price....................................... 35.5 36.8 40.2 51.6
--------- --------- --------- -----
100.0% 100.0% 100.0% 100.0%
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
PATENTS, TRADEMARKS AND TRADE SECRETS
The policy of the Company is to apply for patents and other appropriate
statutory protection when it develops new or improved technology. The Company
presently holds over 40 U.S. patents, as well as a number of trademarks and
copyrights. However, it does not rely solely on such statutory protection to
protect its technology and intellectual property. In addition to seeking patent
protection for its inventions, the Company relies on the laws of unfair
competition and trade secrets to protect its unpatented proprietary rights. The
Company attempts to protect its trade secrets and other unpatented proprietary
information through agreements with customers, vendors, employees and
consultants. In addition, various names used by the Company for its products and
services have been registered with the U.S. Patent and Trademark Office. There
can be no assurance, however, that the Company's patents and copyrights will
provide adequate protection, or that the Company's competitors will not
independently develop or "reverse-engineer" technologies that are substantially
equivalent or superior to the Company's technologies. In addition, there can be
no assurance that the agreements upon which the Company relies to protect its
trade secrets and proprietary information will be adequate to protect the
secrecy of such information.
BACKLOG
Contracts undertaken by the Company may extend beyond one year, and
accordingly, portions are carried forward from one year to the next as part of
backlog. Because many factors affect the scheduling of projects, no assurance
can be given as to when revenue will be realized on projects included in the
Company's backlog. Although backlog represents only business which is considered
to be firm, there can be no assurance that cancellations or scope adjustments
will not occur. The majority of backlog represents contracts under the terms of
which cancellation by the customer would entitle the Company to all or a portion
of its costs incurred and potential fees.
By segment, the commercial backlog at June 30, 1996, was approximately $12.5
million, $6.6 million, $9.3 million and $2.4 million for Communications Systems,
Software Systems, Emerging Technologies and Defense Systems, respectively.
Many of the Company's contracts with the U.S. Government are funded by the
procuring agency from year to year, primarily based on its fiscal requirements.
This results in two different categories of U.S. Government backlog: funded and
unfunded backlog. "Funded backlog" consists of the aggregate contract revenues
remaining to be earned by the Company at a given time, but only to the extent
such amounts have been appropriated by Congress and allocated to the contract by
the procuring Government agency. "Unfunded backlog" consists of (i) the
aggregate contract revenues which are expected to be earned as the Company's
customers incrementally allot funding to existing contracts, whether the Company
is acting as a prime contractor or subcontractor, and (ii) the aggregate
contract revenues which remain to be funded on contracts which have been newly
awarded to the Company. "Backlog" is the total of the commercial and government
funded and unfunded backlog.
33
<PAGE>
The Company's backlog consists of the following approximate amounts as of
June 30, 1996:
<TABLE>
<CAPTION>
BACKLOG
- -----------------------------------------------------------------------------
<S> <C>
Commercial backlog........................................................... $ 30,845,000
U.S. Government funded backlog............................................... 50,719,000
U.S. Government unfunded backlog............................................. 29,983,000
---------------
$ 111,547,000
---------------
---------------
</TABLE>
Backlog at June 30, 1996 includes $37.1 million from Eldyne, Unidyne and
DCS, which were acquired by the Company in May 1996 and excludes backlog of the
Company's Electronics division which was sold in July 1996.
In addition to the backlog described above, at June 30, 1996, the Company
had remaining priced options of over $60 million from the U.S. Navy for
full-scale production of its Mini-DAMA satellite communications terminal and
priced options of approximately $80 million from the U.S. Navy and other
government agencies in the Unidyne business. The Company expects that a
substantial number of these options will be exercised in the future, although
there is no assurance that any options will be exercised.
Management believes that backlog is not necessarily indicative of future
revenues. The Company's backlog is typically subject to large variations from
quarter to quarter as existing contracts are renewed or new contracts are
awarded. Additionally, all U.S. Government contracts included in backlog,
whether or not funded, may be terminated at the convenience of the U.S.
Government.
RESEARCH AND DEVELOPMENT
The Company maintains a staff of engineers, other scientific professionals
and support personnel engaged in development of new applications of technology
and improvement of existing products. These programs' costs are expensed as
incurred. Total expenditures for research and development were $8.9 million,
$12.7 million, $16.7 million, and $4.5 million in 1993, 1994, 1995 and the six
months ended June 30, 1996, respectively. These expenditures included Company
funded research and development of $2.2 million, $5.3 million, $5.9 million, and
$2.4 million and customer sponsored research and development of $6.7 million,
$7.4 million, $10.8 million, and $2.1 million, in 1993, 1994, 1995 and the six
months ended June 30, 1996, respectively. The majority of the Company's customer
sponsored research and development activity is funded under contract to the U.S.
Government.
COMPETITIVE CONDITIONS
DEFENSE SYSTEMS. The Company designs, manufactures and sells earth stations
and related subsystems for use in military satellite communications systems.
Although the Company has significant market share in certain segments of the
military satellite communications systems market, some competitors have greater
financial and personnel resources than the Company.
The Company is one of many involved in providing sophisticated systems
engineering for a variety of programs for agencies of the United States
Government and prime contractors for these agencies. Most activities in which
the Company engages are very competitive and require highly skilled and
experienced technical personnel. Numerous companies compete in the service areas
in which the Company is engaged, many of which have significantly greater
financial and personnel resources than does the Company. As is customary in the
government contracting business, the Company expends time and effort in
preparing competitive proposals, only a portion of which may result in the award
of contracts.
COMMUNICATIONS SYSTEMS. The Company is one of many companies providing
satellite earth station networks and related subsystems in commercial markets.
The products compete based primarily on quality, reliability, service and price.
Competition is intense, and many competitors have greater financial and
personnel resources than the Company.
The Company is one of a few companies in the secure distribution of
television business. These products compete based primarily on quality,
reliability, service and price. The Company's major competitors include General
Instruments Corporation and Scientific Atlanta, Inc., both of whom have
significantly greater resources than the Company.
34
<PAGE>
SOFTWARE SYSTEMS. The Company is one of many developers producing custom
software for commercial clients. The custom software industry is rapidly
changing and is subject to technological obsolescence. Many of the Company's
customers in this business have their own in-house capabilities to perform
certain types of services that might otherwise be performed by the Company. The
primary factors of competition in the custom software development business
include technical skills, knowledge of specific industry operations for which
the software is being developed, management and marketing expertise and price.
EMERGING TECHNOLOGIES. The Company is one of a few companies involved in
the sterilization of disposable medical products prior to their use. This
service competes primarily on quality, reliability, service, safety,
environmental acceptability and price. The Company's major competitors are
Isomedix, Inc. and Sterigenics International, Inc.
The Company competes against a wide variety of companies to perform funded
research and development contracts for the Government. Many of these companies
have substantially greater financial and technical resources than the Company.
The Government's own in-house capabilities and federally-funded (non-profit)
research and development centers are also, in effect, competitors of the Company
in that they perform certain types of services that might otherwise be performed
by the Company. The primary factors of competition in the funded research
business include technical skills, management and marketing expertise and price.
EMPLOYEES
At June 30, 1996, the Company employed approximately 1,400 employees,
predominantly located in the United States, of which 1,100 persons are employed
in the Company's government business units and 300 persons are employed in the
Company's commercial business units.
MANAGEMENT
The Company's executive officers and directors are listed below, together
with their ages and offices held by them. The Company's Board of Directors
consists of seven members elected annually.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- ----------------------------------------------------
<S> <C> <C>
J. S. Webb 76 Chairman of the Board of Directors
Gene W. Ray 58 President, Chief Executive Officer and Director
Louis L. Fowler 58 Vice President and Assistant Secretary
Ronald B. Gorda 41 Senior Vice President
Cornelius L. Hensel 60 Senior Vice President
Bernard M. Hirl 53 Senior Vice President and Chief Financial Officer
Frederick L. Judge 62 Senior Vice President
Prabhav Maniyar 37 Senior Vice President, Corporate Development
Charles R. Allen 70 Director
Joseph F. Caligiuri 68 Director
Daniel J. Fink 69 Director
Robert E. La Blanc 62 Director
Thomas G. Pownall 74 Director
</TABLE>
Mr. Webb served as Vice Chairman of the Board of TRW, Inc., a diversified
manufacturing company, from June 1978 until December 1981 and President of
TRW-Fujitsu Company, a joint venture formed to market Fujitsu's computer
projects in the United States, from May 1980 until his retirement in December
1981.
Dr. Ray was a co-founder of Titan Systems, Inc., the parent of which merged
into the Company in 1985. He served as a Director, Chief Executive Officer and
President of Titan Systems from its inception in 1981 until the merger. He has
been President and Chief Executive Officer of the Company since the merger.
Mr. Fowler has been Vice President since September 1989. From March 1987 to
September 1989 he served as Vice President of Titan Systems, Inc. Prior thereto,
Mr. Fowler was Director of Contracts of Titan Systems, Inc. from March 1985 to
March 1987.
35
<PAGE>
Mr. Gorda has been Senior Vice President since February 1995 and President
of the Linkabit division of the Company since June 1993. From May 1994 to
February 1995 he was a Vice President at Titan. From August 1991 to June 1993 he
served as Senior Vice President of the SATCOM Systems business unit of the
Linkabit division. Prior thereto, he was Senior Program Manager of the SATCOM
Command and Control division of Rockwell International from April 1986 to July
1991.
Mr. Hensel joined the Company in January 1995 and has been Senior Vice
President since February 1995. From January 1994 to December 1994 Mr. Hensel was
Senior Vice President and General Manager of the C(3)I Systems Division of CSC
Professional Systems Group. From June 1988 to December 1993 he was Senior Vice
President and General Manager of the C(3)I Systems Division of Atlantic Research
Corporation.
Mr. Hirl joined the Company in July 1996 as Senior Vice-President and Chief
Financial Officer. From January 1984 to March 1996, Mr. Hirl was employed by
Unisys Corporation, an information systems and services company, where he held a
number of senior financial management positions including Vice President of
Finance in both the government and information systems services businesses of
Unisys.
Mr. Judge has been Senior Vice President since February 1994. From January
1991 to January 1994, Mr. Judge was Senior Vice President and Chief Operating
Officer of Hughes Communications, Inc., a unit of GM Hughes Electronics Corp.
From January 1988 to January 1991, he served as Senior Vice President of Hughes
Communications, Inc.
Mr. Maniyar has been Senior Vice President, Corporate Development since May
1996. From June 1993 to May 1996 he was Chief Financial Officer of Elydne, Inc.,
Unidyne Corporation and Diversified Control Systems, which were acquired by the
Company in May 1996. Prior to that time, Mr. Maniyar held a series of financial
positions with NationsBank.
Mr. Allen was employed by TRW, Inc., a diversified manufacturing company,
from 1955 to 1986, where he held a number of executive management positions,
including director from 1972 to 1986 and Executive Vice President and Chief
Financial Officer from 1977 to 1986.
Mr. Caligiuri was employed by Litton Industries, Inc., a diversified
manufacturing and services company, from 1969 to 1993, where he held a number of
executive management positions, including Executive Vice President from
September 1981 to April 1993.
Mr. Fink was employed by General Electric Co. from 1967 to 1982, where he
held a number of executive management positions, including Senior Vice President
of Corporate Planning and Development, after which he founded and has been the
President of D.J. Fink Associates, Inc., a management consulting firm.
Mr. La Blanc was a General Partner with Salomon Brothers, an investment
banking firm, from 1969 to 1979. From 1979 to 1981 he was Vice Chairman of
Continental Telecom, Inc., after which he founded and has been the President of
Robert E. La Blanc Associates, Inc., a financial and technical consulting firm.
Mr. Pownall was employed by Martin Marietta Corporation, a diversified
manufacturing and services company, from 1963 to 1992 where he held a number of
executive management positions, including director from September 1971 to April
1992, Chief Executive Officer from April 1982 to April 1988, and Chairman of the
Board of Directors from January 1983 to April 1988.
36
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information relating to the beneficial
ownership of the Common Stock by each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock as of
October 18, 1996.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP AS
OF PERCENT OF
NAME OF BENEFICIAL OWNER AUGUST 9, 1996 CLASS
- ---------------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Jack D. Witt................................................................ 1,177,584(1) 7.33%
San Diego, California
</TABLE>
- -------------------
(1) Based on a Schedule 13D, dated June 5, 1996, filed by Mr. Witt with the
Securities and Exchange Commission.
DESCRIPTION OF DEBENTURES
The Debentures will be issued under an indenture (the "Indenture") to be
entered into between the Company
and Norwest Bank Minnesota, National Association, as trustee (the "Trustee").
The following statements are subject to the detailed provisions of the Indenture
and are qualified in their entirety by reference to the Indenture, a copy of
which will be provided to prospective investors by the Company upon request and
is also available for inspection at the office of the Trustee. Wherever
particular provisions of the Indenture are referred to, such provisions are
incorporated by reference as a part of the statements made, and the statements
are qualified in their entirety by such reference.
GENERAL
The Debentures will represent unsecured general obligations of the Company,
subordinate in right of payment to certain other obligations of the Company as
described under "Subordination of Debentures," and convertible into Common Stock
as described under "Conversion." The Debentures will mature on October , 2003.
The Debentures will be limited to $30,000,000 aggregate principal amount
($34,500,000 if the Underwriter's over-allotment option is exercised in full).
The Company will pay interest on the Debentures semi-annually on October and
April of each year, commencing April , 1997 at the rate of % per annum and
will pay interest on the Debentures (except defaulted interest) to the persons
who are registered holders of Debentures at the close of business on the
preceding October and April , respectively (subject to certain exceptions in
the case of Debentures redeemed or repurchased upon a Change in Control between
a record date and the next succeeding interest payment date). The Company may
pay principal and interest by check and may mail an interest check to a holder's
registered address. Holders must surrender Debentures to the Paying Agent to
collect principal payments.
The Debentures will be issued without coupons in denominations of $1,000 and
whole multiples of $1,000. A holder may transfer or exchange Debentures in
accordance with the Indenture. No service charge will be made for any
registration of transfer, exchange or conversion of Debentures, except for any
tax or other governmental charges that may be imposed in connection with any
transfers, registration of transfers or exchanges. The registrar for the
Debentures need not transfer or exchange any Debentures selected for redemption.
Also, it need not transfer or exchange any Debentures for a period of 15 days
before selecting Debentures to be redeemed. The registered holder of a Debenture
may be treated as its owner for all purposes.
Initially, the Trustee will act as Registrar, Paying Agent and Conversion
Agent. The Company may appoint an additional, or change any, Paying Agent,
Registrar or Conversion Agent without notice. The Company may act in any such
capacity.
The Indenture does not contain any restrictions on the payment of dividends
or on the repurchase of securities of the Company or any financial covenants,
nor does the Indenture require the Company to maintain any sinking fund or other
reserves for repayment of the Debentures.
CONVERSION
The holders of the Debentures will be entitled at any time after the
original issuance thereof and before the close of business on the date of
maturity of the Debentures, subject to prior redemption or repurchase, to
convert
37
<PAGE>
the Debentures, or portions thereof (if the portions are $1,000 or whole
multiples thereof) into shares of Common Stock at the conversion price set forth
on the cover page of this Prospectus (subject to adjustments as described
below). Except as described below, no payment or adjustment will be made for
accrued interest on a converted Debenture or for dividends on any Common Stock
issued on conversion. If any Debenture is converted between a record date for
the payment of interest and the next succeeding interest payment date, unless
such Debenture has been called for redemption on a redemption date between such
dates, such Debenture must be accompanied by funds equal to the interest payable
to the registered holder on such interest payment date on the principal amount
so converted. A Debenture converted on an interest payment date need not be
accompanied by any payment, and the interest on the principal amount of the
Debenture being converted will be paid on such interest payment date to the
registered holder of such Debenture on the immediately preceding record date.
The Company will not issue fractional shares of Common Stock upon conversion of
Debentures and instead will deliver a check in lieu of the fractional share
based upon the market value of the Common Stock on the last trading day prior to
the conversion date. In the case of Debentures called for redemption, conversion
rights will expire at the close of business on the tenth calendar day preceding
the redemption date, and in the event any holder exercises its Repurchase Right
(as defined below), such holder's conversion right will terminate upon receipt
of the written notice of exercise of such Repurchase Right. See "--Repurchase at
Option of Holders Upon Change in Control." In the case of Debentures called for
redemption on a redemption date between a record date and the opening of
business on the next succeeding interest payment date, no interest will be
payable on any such Debentures converted during such period.
The conversion price is subject to adjustment as set forth in the Indenture
in certain events, including the payment of dividends or distributions on the
Common Stock in shares of capital stock; subdivisions or combinations of the
Common Stock into a greater or smaller number of shares; a reclassification of
the Common Stock resulting in an issuance of any shares of the capital stock of
the Company; the distribution of rights or warrants to all holders of Common
Stock entitling them for a period of sixty days or less to purchase Common Stock
at less than the then current market price at that time; and the distribution to
all holders of Common Stock of assets or debt securities or any rights or
warrants to purchase securities, other than Common Stock, of the Company (other
than cash dividends or cash distributions payable out of consolidated net income
or retained earnings). No adjustment will be required for rights to purchase
Common Stock pursuant to any plan of the Company for reinvestment of dividends
or interest, or for a change in the par value of the Common Stock. To the extent
that Debentures become convertible into cash, no adjustment will be required
thereafter as to cash. No adjustment in the conversion price will be made unless
such adjustment would require a change of at least $.25 in the conversion price;
however, any adjustment that would otherwise be required to be made shall be
carried forward and taken into account at the earlier of any subsequent
adjustment or three years after the occurrence of the event giving rise to the
adjustment. The Company reserves the right to make such reductions in the
conversion price in addition to those required in the foregoing provisions as
the Company in its discretion shall determine to be advisable in order that
certain stock-related distributions hereafter made by the Company to its
stockholders shall not be taxable. Except as stated above, the conversion price
will not be adjusted for the issuance of Common Stock or any securities
convertible into or exchangeable for Common Stock, or carrying the right to
purchase any of the foregoing. See "Certain Federal Income Tax
Consequences--Conversion."
If the Company reclassifies the Common Stock or merges into, or transfers or
leases substantially all of its assets to, another corporation, the holders of
the Debentures then outstanding will be entitled thereafter to convert such
Debentures into the kind and amount of shares of capital stock, other
securities, cash or other assets which they would have owned immediately after
such event had such Debentures been converted immediately before the effective
date of the transaction.
Conversion price adjustments may in certain circumstances result in
constructive distributions that could be taxable as dividends under the Internal
Revenue Code of 1986, as amended, to holders of Debentures or to holders of
Common Stock issued upon conversion thereof. See "Certain Federal Income Tax
Consequences--Conversion."
38
<PAGE>
OPTIONAL REDEMPTION
The Debentures may be redeemed on at least 20 and not more than 60 days
notice at the option of the Company, in whole at any time or in part from time
to time, at the following redemption prices (expressed as percentages of
principal), together with accrued interest to the date fixed for redemption,
during the twelve month period beginning October , in the years set forth
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------ -------------
<S> <C>
1999.......................... %
2000..........................
2001..........................
2002..........................
</TABLE>
provided, that no redemption may be made prior to October , 1999. If less than
all the Debentures are to be redeemed, the Trustee will select the Debentures to
be redeemed on a pro rata basis, by lot, by such method as may be required by an
exchange on which the Debentures are listed or by any other method the Trustee,
in its discretion, deems fair.
REPURCHASE AT OPTION OF HOLDERS UPON CHANGE IN CONTROL
Upon any Change in Control (as defined below) with respect to the Company,
each holder of Debentures shall have the right (the "Repurchase Right"), at the
holder's option, to require the Company to repurchase all of such holder's
Debentures, or a portion thereof which is $1,000 or any integral multiple
thereof, on the date (the "Repurchase Date") that is 45 days after the date of
the Company Notice (as defined below) at a price equal to 100% of the principal
amount of the Debentures, plus accrued interest, if any, to the Repurchase Date.
Within 30 days after the occurrence of a Change in Control, the Company is
obligated to mail to all holders of record of the Debentures a notice (the
"Company Notice") of the occurrence of such Change in Control and the Repurchase
Right arising as a result thereof. The Company shall deliver a copy of the
Company Notice to the Trustee and shall cause a copy of such notice to be
published in THE WALL STREET JOURNAL or another newspaper of national
circulation. To exercise the Repurchase Right, a holder of Debentures must
deliver on or before the 30th day after the date of the Company Notice
irrevocable written notice to the Company (or an agent designated by the Company
for such purpose) and the Trustee of the holder's exercise of such right
together with the Debentures with respect to which the right is being exercised,
duly endorsed for transfer.
CHANGE IN CONTROL
A "Change in Control" of the Company means (i) the acquisition by any
person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act, (excluding, for this purpose, the Company or its subsidiaries,
or any employee benefit plan of the Company or its subsidiaries which acquires
beneficial ownership of voting securities of the Company) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 50% or more of either the then outstanding shares of Common Stock or the
combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors; or (ii) individuals
who, as of the date of the Indenture, constitute the Board of Directors (as of
the date hereof the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board of Directors, provided that any person becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such person were a member of the Incumbent Board; or (iii)
approval by the stockholders of the Company of a reorganization, merger or
consolidation, in each case, with respect to which persons who were the
stockholders of the Company immediately prior to such reorganization, merger or
consolidation do not, immediately thereafter, own more than 50% of the combined
voting power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated company's then outstanding voting
securities; or (iv) a liquidation or dissolution of the Company (other than
pursuant to the United States Bankruptcy Code) or the conveyance, transfer or
leasing of all or substantially all of the assets of the Company.
No quantitative or other established meaning has been given to the phrase
"all or substantially all" (which appears in the definition of Change in
Control) by courts which have interpreted this phrase in various contexts. In
interpreting this phrase, courts make a subjective determination as to the
portion of assets conveyed, considering
39
<PAGE>
such factors as the value of assets conveyed and the proportion of an entity's
income derived from the assets conveyed. To the extent the meaning of such
phrase is uncertain, uncertainty will exist as to whether or not a Change in
Control may have occurred (and, accordingly, whether or not the holders of
Debentures will have the right to require the Company to repurchase their
Debentures).
The occurrence of a Change in Control would, in most cases, permit the
lenders to require prepayment of some or all amounts outstanding under the
Company's bank lines of credit and other debt agreements. See "Capitalization."
In the event of a Change in Control, any repurchase of the Debentures could,
absent payment in full of any amounts outstanding under such credit facilities
or waiver, be prevented by the subordination provisions of the Debentures. See
"--Subordination of Debentures." Failure by the Company to repurchase the
Debentures when required will result in an Event of Default with respect to the
Debentures whether or not such repurchase is permitted by the subordination
provisions. The right to require the Company to repurchase the Debentures could
delay or deter a Change in Control of the Company, whether or not such Change in
Control were supported by the Board of Directors of the Company.
If a Change in Control occurs, there can be no assurance that the Company
would have sufficient funds or financing to repay any Senior Debt then required
to be repaid or to repurchase any or all Debentures then required to be
repurchased under the Indenture.
If an offer is made to repurchase Debentures as a result of a Change in
Control, the Company intends to comply with all tender offer rules, including
but not limited to Section 13(e) and 14(e) under the Exchange Act and Rules
13c-1 and 14c-1 thereunder, to the extent applicable to such offer.
SUBORDINATION OF DEBENTURES
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, the
payment of the principal of and premium, if any, and interest on the Debentures
will be subordinated, to the extent provided in the Indenture, in right of
payment to the prior payment in full of all Senior Debt.
No payment of principal of or premium, if any, or interest may be made by
the Company, directly or indirectly, on the Debentures (including any repurchase
pursuant to the exercise of the Repurchase Right) or to acquire any of the
Debentures at any time if a default in payment of the principal of or premium,
if any, or interest on Senior Debt exists, unless and until such default shall
have been cured or waived or shall have ceased to exist. During the continuance
of any event of default with respect to any Senior Debt, as such event of
default is defined under any such Senior Debt or in any agreement pursuant to
which any Senior Debt has been issued (other than default in payment of the
principal of, or premium, if any, or interest on any Senior Debt), permitting
the holders thereof to accelerate the maturity thereof, no payment may be made
by the Company, directly or indirectly, with respect to principal of or premium,
if any, or interest on the Debentures for 90 days following written notice to
the Company, from any holder or holders thereof or their representative or
representatives or the trustee or trustees under any indenture under which any
instrument evidencing any such Senior Debt may have been issued, that such an
event of default has occurred and is continuing. However, if the maturity of
such Senior Debt is accelerated, no payment may be made on the Debentures until
such Senior Debt that has matured has been paid or such acceleration has been
cured or waived.
Senior Debt is defined in the Indenture as Debt (as defined below) of the
Company outstanding at any time except Debt that by its terms is subordinate in
right of payment to the Debentures or Debt that is not otherwise senior in right
of payment to the Debentures. Senior Debt does not include Debt of the Company
to any of its subsidiaries. Debt is defined with respect to any person as the
principal of, and premium, if any, and interest on (a) all indebtedness of such
person for borrowed money (including all indebtedness evidenced by notes, bonds,
debentures or other securities sold by such person for money), (b) all
indebtedness incurred by such person in the acquisition (whether by way of
purchase, merger, consolidation or otherwise and whether by such person or
another person) of any business, real property or other assets (except assets
acquired in the ordinary course of the conduct of the acquiror's usual
business), (c) guarantees by such person of indebtedness described in clause (a)
or (b) of any other person, (d) all renewals, extensions, refundings, deferrals,
restructurings, amendments and modifications of any such indebtedness,
obligation or guarantee, (e) all reimbursement obligations of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person, (f) all capital lease
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obligations of such person, and (g) all net obligations of such person under
interest rate swap or similar agreements of such person. There are no
restrictions in the Indenture upon the creation of additional Senior Debt by the
Company, or on the creation of any indebtedness by the Company or any of its
subsidiaries. As of September 30, 1996, the Company had Senior Debt (excluding
accrued interest) of approximately $29.7 million.
By reason of the subordination provisions described above, in the event of
insolvency, funds which would otherwise be payable to Debentureholders will be
paid to the holders of Senior Debt to the extent necessary to pay Senior Debt in
full. As a result of these payments, general creditors of the Company may
recover less, ratably, than holders of Senior Debt and such general creditors
may recover more, ratably, than holders of Debentures or other subordinated
indebtedness of the Company.
MERGER OR CONSOLIDATION
The Indenture will not permit the Company to consolidate with, or merge
into, or transfer or lease all or substantially all of its assets to, another
person unless such other person is a corporation organized under the laws of the
United States, any State thereof or the District of Columbia and such person
assumes by supplemental indenture all the obligations of the Company under the
Debentures and the Indenture, and immediately after giving effect to the
transaction, no default shall exist.
DEFAULTS AND REMEDIES
An Event of Default includes the occurrence of any of the following: default
for 30 days in payment of interest; default in payment of principal at maturity,
upon redemption or exercise of a Repurchase Right or otherwise; default in
payment on Debt at maturity of at least $5,000,000 principal amount and
continuance of such default for 30 days after notice given in accordance with
the Indenture, or default on Debt and, as a result, payment of at least
$5,000,000 principal amount of Debt is accelerated without such acceleration
having been cured, waived, rescinded, or annulled for 30 days after notice given
in accordance with the Indenture; failure by the Company for 60 days after
notice to it to comply with any of its other agreements in the Indenture or the
Debentures; and certain events of bankruptcy or insolvency. If an Event of
Default occurs and is continuing, the Trustee or the holders of at least 25% in
principal amount of the Debentures may declare all the Debentures to be due and
payable immediately, except for defaults due to certain events of bankruptcy or
insolvency in which case if an Event of Default occurs and is continuing,
automatically the principal of all the Debentures and the interest thereon shall
become immediately due and payable. The Trustee may require indemnity
satisfactory to it before it enforces the Indenture or the Debentures. Subject
to certain limitations, holders of a majority in principal amount of the
Debentures may direct the Trustee in its exercise of any trust power. The
Trustee may withhold from Debentureholders notice of any default (except a
default in payment of principal or interest) if it determines that withholding
notice is in their interests. The Company is required to file with the Trustee
annually an officers' statement as to the absence of defaults in fulfilling any
of its obligations under the Indenture.
MODIFICATIONS OF THE INDENTURE
The Company and the Trustee may amend the Indenture without notice to any
Debentureholder but with the written consent of the holders of a majority in
principal amount of the outstanding Debentures. However, without the consent of
each Debentureholder affected, an amendment may not: (i) reduce the amount of
Debentures whose holders must consent to an amendment; (ii) reduce the rate or
change the time for payment of interest on any Debenture; (iii) reduce the
principal of or change the fixed maturity of any Debenture (including, without
limitation, the optional redemption provisions or the Repurchase Right); (iv)
make any Debenture payable in money other than that stated in the Debenture; (v)
change the provisions of the Indenture regarding the right of a majority of the
Debentureholders to waive defaults under the Indenture or impair the right of
any Debentureholder to institute suit for the enforcement of any payment of
principal and interest on the Debentures on and after their respective due
dates; (vi) make any change that adversely affects the rights to convert any
Debenture; or (vii) make any change in the terms of the Debentures that
adversely affects the rights of any Debentureholder.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged and cancelled upon the satisfaction of
certain conditions, including the payment of all the Debentures or the deposit
with the Trustee, within not more than six months prior to the maturity of the
Debentures or within one year of redemption of all of the Debentures, of funds
sufficient for such payment or redemption.
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REPORTS TO HOLDERS OF DEBENTURES
The Company will regularly furnish to each holder of Debentures copies of
its annual report to stockholders, containing audited financial statements, and
any other financial reports which the Company furnishes to its stockholders.
TRUSTEE AND TRANSFER AGENT
The Trustee and transfer agent for the Debentures is Norwest Bank Minnesota,
National Association, American Stock Transfer and Trust Company currently serves
as the transfer agent for the Common Stock.
LISTING
The Debentures are a new issue of securities for which there is currently no
public market. The Company has applied to list the Debentures for trading on the
NYSE. No assurance can be given, however, as to the liquidity of or trading
market for the Debentures.
BOOK ENTRY
The Debentures will initially be issued in the form of one or more
Debentures in global form (a "Global Security"). Upon the issuance of a Global
Security, the Depository or its nominee will credit the accounts of persons
holding through it with the respective principal amounts of the Debentures
represented by such Global Security. Such accounts will be designated by the
Underwriter with respect to Debentures placed by the Underwriter for the
Company. Ownership of beneficial interests in a Global Security will be limited
to persons that have accounts with the Depository ("participants") or persons
that may hold interests through participants. Ownership of beneficial interests
by participants in a Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by the
Depository for such Global Security. Ownership of beneficial interests in such
Global Security by persons that hold through participants will be shown on, and
the transfer of that ownership interest through such participant will be
effected only through, records maintained by such participant. The foregoing may
impair the ability to transfer beneficial interests in a Global Security.
Payment of principal, premium, if any, and interest on Debentures
represented by any such Global Security will be made to the Depository or its
nominee, as the case may be, as the sole Holder of the Debentures represented
thereby for all purposes under the Indenture. None of the Company, the Trustee,
any agent of the Company or the Trustee or the Underwriter will have any
responsibility or liability for any aspect of the Depository's records relating
to or payments made on account of beneficial ownership interests in a Global
Security representing any Debentures or for maintaining, supervising or
reviewing any of the Depository's records relating to such beneficial ownership
interests.
The Company has been advised by the Depository that, upon receipt of any
payment of principal, premium, if any, or interest on any Global Security, the
Depository will immediately credit, on its book-entry registration and transfer
system, the accounts of participants with payments in amounts proportionate to
their respective beneficial interests in the principal amount of such Global
Security as shown on the records of the Depository. Payments by participants to
owners of beneficial interests in a Global Security held through such
participants will be governed by standing instructions and customary practices
as is now the case with securities held for customer accounts registered in
"street name," and will be the sole responsibility of such participants.
A Global Security may not be transferred except as a whole by the Depository
for such Global Security to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository or by such
Depository or any such nominee to a successor of such Depository or a nominee of
such successor. If the Depository is at any time unwilling or unable to continue
as depository and a successor depository is not appointed by the Company or the
Depository within 90 days, the Company will issue Debentures in definitive form
in exchange for the Global Security. In addition, the Company may at any time
and in its sole discretion determine not to have the Debentures represented by
the Global Security and, in such event, the Company will issue Debentures in
definitive form in exchange for the Global Security. In either instance, an
owner of a beneficial interest in the Global Security will be entitled to have
Debentures equal in principal amount to such beneficial interest registered in
its name and will be entitled to physical delivery of such Debentures in
definitive form. Debentures so issued in definitive form will be issued in
denominations of $1,000 and integral multiples thereof and
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will be issued in registered form only, without coupons. Principal, premium, if
any, and interest on the Debentures will be payable, and the Debentures may be
presented for registration of transfer or exchange, at the offices of the
Trustee.
So long as the Depository for a Global Security, or its nominees, is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole Holder of the Debentures
represented by such Global Security for the purposes of receiving payment on the
Debentures, receiving notices and for all other purposes under the Indenture and
the Debenture. Beneficial interests in Debentures will be evidenced only by, and
transfers thereof will be effected only through, records maintained by the
Depository and its participants. Cede & Co. has been appointed as the nominee of
the Depository. Except as provided above, owners of beneficial interests in a
Global Security will not be entitled to and will not be considered the Holders
thereof for any purposes under the Indenture. Accordingly, any such person
owning a beneficial interest in such a Global Security must rely on the
procedures of the Depository, and, if any such person is not a participant, on
the procedures of the participant through which such person owns its interest,
to exercise any rights of a Holder under the Indenture. The Indenture provides
that the Depository may grant proxies and otherwise authorize participants to
give or take any request, demand, authorization, direction, notice, consent,
waiver or other action which a Holder is entitled to give or take under the
Indenture. The Company understands that under existing industry practices, in
the event that the Company requests any action of Holders or that an owner of a
beneficial interest in such a Global Security desires to give or take any action
which a Holder is entitled to give or take under the Indenture, the Depository
would authorize the participants holding the relevant beneficial interest to
give or take such action and such participants would authorize beneficial owners
owning through such participants to give or take such action or would otherwise
act upon the instructions of beneficial owners owning through them.
The Depository has advised the Company that the Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered under the Exchange Act. The Depository was created to hold the
securities of its participants and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (including the
Underwriter), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own the Depository.
Access to the Depository's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies, that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01 per share, and 2,500,000 shares of Preferred Stock,
par value $1.00 per share. As of October 2, 1996, there were 16,158,618 shares
of Common Stock outstanding, 694,872 shares of Cumulative Convertible Preferred
Stock outstanding and 500,000 shares of Series B Cumulative Convertible
Redeemable Preferred Stock outstanding.
COMMON STOCK
Holders of outstanding Common Stock are entitled to such dividends as may be
declared by the Company Board of Directors out of the assets legally available
for that purpose, and are entitled to one vote per share on all matters
submitted to a vote of the stockholders of the Company. The holders of shares of
Common Stock do not have cumulative voting rights. Therefore, the holders of
more than 50% of the Common Stock voting for the election of directors (together
with any other classes of capital stock entitled to vote therewith) can elect
all the directors, and the remaining holders will not be able to elect any
directors. The holders of Common Stock have no pre-emptive or other subscription
rights, and there are no conversion or redemption or sinking fund provisions
with respect to such shares.
All of the outstanding shares of Common Stock will be, when issued upon
conversion of the Debentures, duly authorized, validly issued, fully paid and
nonassessable.
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PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 2,500,000
shares of Preferred Stock in one or more series, from time to time, with such
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations and restrictions thereof, as may be
provided in a resolution or resolutions adopted by the Company's Board of
Directors. The authority of the Company's Board of Directors includes, but is
not limited to, the determination or fixing of the following with respect to
shares of such class or any series thereof: (i) the number of such shares; (ii)
the dividend rate and the date from which dividends are to be cumulative, if
any; (iii) whether such shares are to be redeemable and, if so, the terms and
amount of any sinking fund providing for the purchase or redemption of such
shares; (iv) whether such shares shall be convertible, and, if so, the terms and
provisions thereof; (v) what restrictions are to apply, if any, on the issue or
reissue of any additional shares of Preferred Stock; (vi) the rights of such
shares in the event of a liquidation or dissolution, or upon the distribution of
assets of the Company; and (vii) whether such shares have voting rights. Shares
of Preferred Stock may be issued with a preference over the Common Stock as to
the payment of dividends.
Classes of stock such as the Preferred Stock may be used, in certain
circumstances, to create voting impediments on extraordinary corporate
transactions or to frustrate persons seeking to effect a merger or otherwise to
gain control of the Company. For the foregoing reasons, any shares of Preferred
Stock issued by the Company could have an adverse effect on the rights of the
holders of the Common Stock.
The Company presently has authorized the issuance of three series of
Preferred Stock, each of which is described more fully below.
CUMULATIVE CONVERTIBLE PREFERRED STOCK. As of October 2, 1996, the Company
had issued and outstanding 694,872 shares of its $1.00 Cumulative Convertible
Preferred Stock (the "Cumulative Convertible Preferred Stock"). The Cumulative
Convertible Preferred Stock accrues dividends at a rate of $1.00 per share per
annum, payable quarterly in arrears cumulatively. The Cumulative Convertible
Preferred Stock entitles the holder thereof to one-third vote per outstanding
share, voting together as a class with the holders of the Company's Common Stock
(and any other series or classes of capital stock entitled to vote therewith) on
all matters submitted for a stockholder vote. If and whenever accrued dividends
on the Cumulative Convertible Preferred Stock have not been paid in an amount
sufficient to constitute six consecutive quarterly dividends, then upon such
event, the holders of the Cumulative Convertible Preferred Stock, voting
separately as a class, are entitled at any annual meeting of stockholders, or
special meeting held in place thereof, to elect two directors until all
dividends in default on the Cumulative Convertible Preferred Stock have been
paid in full. The Cumulative Convertible Preferred Stock is convertible at any
time at the option of the holder thereof into two-thirds of a share of the
Company's Common Stock (subject to customary anti-dilution adjustments). The
Cumulative Convertible Preferred Stock is redeemable at the Company's option at
a redemption price of $20.00 per share, plus accrued but unpaid dividends. Upon
liquidation, the holders of the Cumulative Convertible Preferred Stock are
entitled to receive $20.00 per share, plus accrued but unpaid dividends, before
any distribution is made to the holders of the Common Stock.
SERIES B PREFERRED STOCK. As of October 2, 1996, the Company had issued and
outstanding 500,000 shares of its Series B Cumulative Convertible Redeemable
Preferred Stock (the "Series B Preferred Stock"). The Series B Preferred Stock
accrues dividends at a rate of 6% per annum payable quarterly in arrears
cumulatively, has a liquidation preference of $6.00 per share plus accrued and
unpaid dividends (the "Series B Liquidation Preference") and entitles the holder
thereof to one vote per outstanding share, voting together as a class with the
holders of shares of outstanding Common Stock (and any other series or classes
entitled to vote therewith) on all matters submitted for a stockholder vote. The
Series B Preferred Stock is convertible at the holder's option into shares of
Common Stock at a conversion price of $9.00 per share (subject to customary
anti-dilution adjustments) on or after November 24, 1996 until November 24,
1997. The Series B Preferred Stock also is redeemable at the Series B
Liquidation Preference (i) at the holder's option, after May 24, 1998 until May
24, 2001, and (ii) at Titan's option, after May 24, 2001 until May 24, 2006.
SERIES A JUNIOR PREFERRED STOCK; RIGHTS PLAN. On August 17, 1995, the
Company's Board of Directors adopted a Shareholder Rights Plan and subsequently
distributed one Preferred Stock purchase right (a "Right") for each outstanding
share of the Company's Common Stock. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of the Company's
Series A Junior Participating Preferred Stock,
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par value $1.00 per share (the "Series A Junior Preferred Stock") at a price of
$42.00 per one one-hundredth of a share of Series A Junior Preferred Stock
(subject to customary anti-dilution adjustments). The Rights become exercisable
if a person or group acquires, in a transaction not approved by the Company's
Board of Directors, 15% or more of the Company's Common Stock or announces a
tender offer for 15% or more of the Company's Common Stock.
If a person or group acquires 15% or more of the Company's Common Stock,
each Right (other than Rights held by the acquiring person or group which become
void) will entitle the holder to receive upon exercise a number of shares of
Company Common Stock having a market value of twice the Right's exercise price.
If the Company is acquired in a transaction not approved by the Board of
Directors, each Right may be exercised for common shares of the acquiring
company having a market value of twice the Right's exercise price. The Company
may redeem the Rights at $.01 per Right, subject to certain conditions. The
Rights expire on August 17, 2005.
The Series A Junior Preferred Stock is not redeemable by the Company. Each
share of Series A Junior Preferred Stock is entitled to a minimum preferential
quarterly dividend payment of $1.00 per share but is entitled to an aggregate
dividend of 100 times the amount of any dividend declared per share on the
Company's Common Stock. In the event of liquidation, the holders of the Series A
Junior Preferred Stock will be entitled to a minimum preferential liquidation
payment of $100 per share but will be entitled to an aggregate payment of 100
times the payment made per outstanding share of Common Stock. Each share of
Series A Junior Preferred Stock will have 100 votes, voting together with the
outstanding shares of Common Stock (and any other series or classes entitled to
vote therewith) on all matters submitted for a stockholder vote. In the event of
any merger, consolidation or other transaction in which shares of Common Stock
are exchanged, each share of Series A Junior Preferred Stock will be entitled to
receive 100 times the amount received per outstanding share of Common Stock.
These rights are protected by customary anti-dilution provisions. As of October
2, 1996, no shares of Series A Junior Preferred Stock were issued and
outstanding, although the Company had reserved for issuance 250,000 shares of
its Series A Junior Preferred Stock.
LIQUIDATION AND OTHER RIGHTS
Upon liquidation, the holders of Common Stock are entitled to share ratably
in assets available for distribution to stockholders after satisfaction of any
liquidation preferences of outstanding Preferred Stock. The issuance of any
shares of a series of Preferred Stock in future financings, acquisitions or
otherwise may result in dilution of voting power and relative equity interest of
the holders of shares of Common Stock and will subject the Common Stock to the
prior dividend and liquidation rights of the outstanding shares of the series of
Preferred Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the General Corporation Law of Delaware prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
upon consummation of such transaction the interested stockholder owned 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced or unless the business combination is, or the transaction in which
such person became interested stockholder was, approved in a prescribed manner.
A "business combination" includes a merger, an asset sale and any other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of the corporation's voting stock.
TRANSFER AGENT
The transfer agent for the Common Stock is American Stock Transfer and Trust
Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences expected to result to original holders from the purchase,
ownership, conversion and disposition of the Debentures. This summary is based
upon current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable Treasury regulations, judicial authority and administrative
rulings and practice. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth
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below. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders. Moreover, no assurance can be
offered that the Internal Revenue Service (the "Service") will not take contrary
positions, and no rulings from the Service have been or will be sought.
The following summary is for general information only. The summary does not
discuss all aspects of federal income taxation that may be relevant to
particular holders in light of their specific circumstances or to certain types
of holders that may be subject to special rules (including insurance companies,
tax-exempt organizations, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). EACH PURCHASER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING, CONVERTING AND DISPOSING OF
THE DEBENTURES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS.
STATED INTEREST
Stated interest on the Debentures will be reported to holders and the
Service, and generally will be taxable to the holders as ordinary income in
accordance with their methods of accounting for tax purposes.
BACKUP WITHHOLDING
A holder may be subject to backup withholding at the rate of 31% with
respect to interest paid on and gross proceeds from a sale of the Debentures,
unless (i) the holder is a corporation or comes within certain other exempt
categories and, when required, demonstrates the relevant facts or (ii) the
holder provides a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A holder who does not provide the
Company with his or her correct taxpayer identification number may be subject to
penalties imposed by the Service. The Company will report to the holders and the
Service the amount of any "reportable payments" (including stated interest on
the Debentures) and any amount withheld with respect to the Debentures during
the calendar year. The amount of any backup withholding generally will be
allowed as a credit against the holder's federal income tax liability, and
excess withholdings may entitle the holder to a refund.
CONVERSION
A holder should not recognize gain or loss on the conversion of a Debenture
into Common Stock, except with respect to cash received in lieu of fractional
shares and except to the extent that the Common Stock issued upon conversion is
attributed to accrued interest on the Debentures. (To the extent the Debentures
converted are subject
to accrued market discount, which might occur for subsequent purchasers of the
Debentures as is described below, the amount of the accrued market discount will
carry over to the Common Stock on conversion and will be treated as ordinary
income on disposition of the Common Stock.) If Common Stock is received by a
holder without recognition of gain or loss, the holding period of the Common
Stock received upon conversion of a Debenture will include the period during
which the Debenture was held (provided the Debenture was a capital asset in the
hands of the holder prior to the conversion), and the holder's aggregate tax
basis in the Common Stock will be equal to his or her tax basis in the Debenture
surrendered, less any tax basis allocable to any fractional share that otherwise
would have been received.
A holder will recognize taxable gain or loss on cash received in lieu of
fractional shares of Common Stock in an amount equal to the difference between
the amount of cash received and the portion of the holder's adjusted tax basis
in the Debenture allocable to the fractional shares. The gain or loss should be
capital gain or loss if the fractional shares are capital assets in the hands of
the holder and should be long-term capital gain or loss if the fractional shares
have been deemed held for more than one year.
Adjustments in the conversion price of the Debentures made pursuant to the
anti-dilution provisions to reflect distributions to holders of Common Stock may
result in constructive distributions to holders that could be taxable to them as
dividends pursuant to Section 305 of the Code.
TAXABLE DISPOSITION
In general, a holder will recognize gain or loss upon the sale, exchange,
redemption or other taxable disposition of a Debenture measured by the
difference between (i) the amount realized (the amount of cash and the fair
market value of property received) and (ii) the holder's tax basis in the
Debenture (for subsequent purchasers of Debentures, either as increased by any
market discount previously included in income by the holder or as decreased
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by any amortizable bond premium previously deducted by the holder). Any such
gain or loss will generally be long-term capital gain or loss, provided the
Debenture was a capital asset in the hands of the holder and had been held for
more than one year. If any portion of the amount realized by the holder is
attributable to accrued but as yet unreported interest income, it will not be
taken into account in determining any gain or loss, and instead will be
reportable as ordinary income.
Original holders should be aware that subsequent holders who acquire the
Debentures at a discount or a premium may be affected by the market discount and
amortizable bond premium provisions of the Code described generally below.
MARKET DISCOUNT
Purchasers of Debentures should be aware that subsequent holders may be
affected by the market discount provisions of the Code. A purchase at a market
discount includes a purchase at or after the original issue at a price below the
stated redemption price at maturity. Those rules generally provide that, subject
to a statutorily-defined DE MINIMIS exception, if a holder of a debt instrument
purchases it at a market discount and later recognizes gain on a disposition of
the debt instrument (including a gift), the lesser of the gain (or appreciation,
in the case of a gift) or the portion of the market discount that accrued while
the debt instrument was held by the holder will be treated as ordinary interest
income at the time of the disposition.
The market discount rules also provide that a holder who acquires a debt
instrument at market discount (and who does not elect to include the market
discount in income on a current basis) may be required to defer a portion of any
interest expense that may otherwise be deductible on any indebtedness incurred
or maintained to purchase or carry that debt instrument until the holder
disposes of the debt instrument in a taxable transaction.
The Debentures provide that they may be redeemed, in whole or in part,
before maturity. If some or all of the Debentures are redeemed in part, each
holder of a Debenture acquired at a market discount would be required to treat
the principal payment as ordinary interest income to the extent of any accrued
market discount on such Debenture.
A holder of a debt instrument acquired at a market discount may elect to
have market discount accrue on a constant interest rate basis (as opposed to a
straight line basis). In addition, a holder of a debt instrument acquired at a
market discount may elect to include the market discount in income as the
discount accrues, either on a straight line basis or, if elected, on a constant
interest rate basis. The current inclusion election, once made, applies to all
market discount obligations acquired by the holder on or after the first day of
the first taxable year to which the election applies, and may not be revoked
without the consent of the Service. If a holder elects to include market
discount in income in accordance with the preceding sentence, the rules
described above concerning the recognition of ordinary income on a sale or
certain other dispositions of such a Debenture and the deferral of interest
deductions on indebtedness related to such a Debenture would not apply.
AMORTIZABLE BOND PREMIUM
Purchasers of Debentures also should be aware that subsequent holders may be
affected by the amortizable bond premium provisions of the Code. Generally, if
the tax basis of an obligation held as a capital asset exceeds the amount
payable at maturity of the obligation, the excess may constitute amortizable
bond premium that the holder may elect to amortize under the constant interest
rate method and deduct over the period from his or her acquisition date to the
obligation's maturity date. A holder who elects to amortize bond premium must
reduce his or her tax basis in the related obligation by the amount of the
aggregate deductions allowable for amortizable bond premium.
In the case of a debt instrument, such as a Debenture, that may be called at
a premium prior to maturity, an earlier call date of the debt instrument is
treated as the maturity date of the debt instrument and the amount of bond
premium is determined by treating the amount payable on that call date as the
amount payable at maturity if the calculation produces a smaller amortizable
bond premium than the method described in the preceding paragraph. If a holder
of a debt instrument is required to amortize and deduct bond premium by
reference to a certain call date, the debt instrument, if not called on such
date, will be treated as reissued on that date for the amount so payable for
purposes of the subsequent application of the bond premium rules. If a debt
instrument
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purchased at a premium is redeemed prior to its maturity, a purchaser who has
elected to deduct bond premium may be permitted to deduct any remaining
unamortized bond premium as an ordinary loss in the taxable year of redemption.
The amortizable bond premium deduction is treated as an offset to interest
income on the related security for federal income tax purposes. Each potentially
affected holder is urged to consult his or her tax advisor as to the
consequences of the treatment of any such premium as an offset to interest
income for federal income tax purposes.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH PURCHASER OF
DEBENTURES SHOULD CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP, CONVERSION AND
DISPOSITION OF THE DEBENTURES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
filed as an exhibit to the Registration Statement, the Company has agreed to
sell to Dillon, Read & Co. Inc. (the "Underwriter") and the Underwriter has
agreed to purchase the Debentures. If any Debentures are purchased by the
Underwriter, all Debentures will be so purchased.
The Underwriter proposes to offer the Debentures directly to the public at
the price to public set forth on the cover page of this Prospectus or at such
price less a concession of % of the principal amount of Debentures on sales to
certain dealers. The Underwriter may allow, and such dealers may reallow, a
concession not in excess of % of the principal amount on sales to certain
other dealers.
The offering of the Debentures is made for delivery when, as, and if
accepted by the Underwriter and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriter
reserves the right to reject any order for the purchase of Debentures. After the
Debentures are released for sale to the public, the offering price and
concession may be changed by the Underwriter.
The Company has granted to the Underwriter an option, which must be
exercised within 30 days after the date of this Prospectus, to purchase up to an
additional $4,500,000 in aggregate principal amount of Debentures to cover
over-allotments, if any, on the same terms per Debenture.
The Company and its officers and directors have agreed that until 180 days
after the date of the Underwriting Agreement, without the prior written consent
of the Underwriter, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company which are, or which are convertible
into or exchangeable or exercisable for securities which are, substantially
similar to the Debentures or Common Stock other than the Debentures, or the
Common Stock issuable upon conversion of the Debentures.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriter may be required to make in respect thereof.
The Debentures are a new issue of securities for which there is currently no
public market. The Company has applied to list the Debentures for trading on the
NYSE. No assurance can be given, however, as to the liquidity of or trading
market for the Debentures.
LEGAL MATTERS
The legality of the Debentures will be passed upon for the Company by Latham
& Watkins, San Diego, California. Certain legal matters will be passed upon for
the Underwriter by Gibson, Dunn & Crutcher LLP, New York, New York.
INDEPENDENT PUBLIC ACCOUNTANTS
The audited financial statements included or incorporated by reference in
this prospectus and elsewhere in the registration statement, to the extent and
for the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
49
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995...................................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995.............. F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995...................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995......................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Unaudited Consolidated Statement of Operations for the six months ended
June 30, 1995 and June 30, 1996.......................................... F-17
Consolidated Balance Sheet as of December 31, 1995 and Unaudited
Consolidated Balance Sheet as of June 30, 1996........................... F-18
Unaudited Consolidated Statement of Cash Flows for the six months ended
June 30, 1995 and June 30, 1996.......................................... F-19
Unaudited Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1995 and June 30, 1996............................. F-20
Notes to Unaudited Consolidated Financial Statements...................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of The Titan Corporation:
We have audited the accompanying consolidated balance sheets of The Titan
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995,
and 1994, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Titan Corporation and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As explained in Note 5 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
ARTHUR ANDERSEN LLP
San Diego, California
February 28, 1996
F-2
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues...................................................................... $ 149,414 $ 136,206 $ 133,967
---------- ---------- ----------
Costs and expenses:
Cost of revenues............................................................ 134,574 99,921 102,231
Selling, general and administrative expense................................. 27,230 22,511 23,538
Research and development expense............................................ 2,257 5,339 5,904
Restructuring and other (income) expense, net............................... -- (1,200) 6,249
---------- ---------- ----------
Total costs and expenses.................................................... 164,061 126,571 137,922
---------- ---------- ----------
Operating profit (loss)....................................................... (14,647) 9,635 (3,955)
Interest expense.............................................................. (1,590) (923) (1,154)
Interest income............................................................... 84 291 95
---------- ---------- ----------
Income (loss) before income taxes and cumulative effect of change
in accounting................................................................ (16,153) 9,003 (5,014)
Income tax provision (benefit)................................................ (6,547) 3,050 (1,207)
---------- ---------- ----------
Net income (loss) before cumulative effect of change in accounting............ (9,606) 5,953 (3,807)
Cumulative effect as of January 1, 1993, of change in accounting for income
taxes........................................................................ 1,700 -- --
---------- ---------- ----------
Net income (loss)............................................................. (7,906) 5,953 (3,807)
Dividend requirement on preferred stock....................................... (695) (695) (695)
---------- ---------- ----------
Net income (loss) applicable to common stock.................................. $ (8,601) $ 5,258 $ (4,502)
---------- ---------- ----------
---------- ---------- ----------
Per Average Common Share:
Income (loss) before cumulative effect of change in accounting.............. $ (.87) $ .40 $ (.33)
Cumulative effect of change in accounting for income taxes.................. .14 -- --
---------- ---------- ----------
Net income (loss)........................................................... $ (.73) $ .40 $ (.33)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUES)
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................................. $ 5,129 $ 5,833
Accounts receivable--net.................................................................. 36,164 39,360
Inventories............................................................................... 7,155 10,399
Prepaid expenses and other current assets................................................. 2,430 2,872
Deferred income taxes..................................................................... 4,769 4,809
--------- ---------
Total current assets.................................................................. 55,647 63,273
Property and equipment--net................................................................. 12,932 18,295
Goodwill--net of accumulated amortization of $3,289 and $3,842.............................. 4,103 3,550
Other assets................................................................................ 9,221 10,052
--------- ---------
Total assets.......................................................................... $ 81,903 $ 95,170
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................................... $ 7,402 $ 10,184
Line of credit............................................................................ -- 9,200
Current portion of long-term debt......................................................... 556 1,019
Accrued compensation and benefits......................................................... 11,000 9,192
Other accrued liabilities................................................................. 15,250 13,803
--------- ---------
Total current liabilities............................................................. 34,208 43,398
--------- ---------
Long-term debt.............................................................................. 765 4,281
--------- ---------
Other non-current liabilities............................................................... 8,162 8,852
--------- ---------
Commitments and contingencies...............................................................
Stockholders' Equity:
Preferred stock; $1 par value; authorized 2,500,000 shares:
Cumulative convertible, $13,897 liquidation preference:
694,872 shares issued and outstanding................................................. 695 695
Series A junior participating: none issued.............................................. -- --
Common stock: $.01 par value; authorized 30,000,000 shares;
issued and outstanding: 14,632,458 and 15,087,087 shares................................. 146 151
Capital in excess of par value............................................................ 27,860 31,148
Retained earnings......................................................................... 14,671 10,169
Treasury stock (1,521,534 and 1,161,147 shares), at cost.................................. (4,604) (3,524)
--------- ---------
Total stockholders' equity............................................................ 38,768 38,639
--------- ---------
Total liabilities and stockholders' equity............................................ $ 81,903 $ 95,170
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).............................................................. $ (7,906) $ 5,953 $ (3,807)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Restructuring activities..................................................... -- (1,200) (486)
Cumulative effect of accounting change....................................... (1,700) -- --
Depreciation and amortization................................................ 4,495 3,424 4,117
Deferred income taxes and other.............................................. (3,354) 681 178
Change in operating assets and liabilities (net of effects of sale of
businesses):
Accounts receivable.......................................................... 1,850 8,091 (3,196)
Inventories.................................................................. 3,332 (494) (3,287)
Prepaid expenses and other assets............................................ (406) 160 811
Accounts payable............................................................. 2,347 (44) 2,782
Income taxes payable......................................................... (1,688) -- --
Accrued compensation and benefits............................................ 892 1,559 (1,808)
Other liabilities............................................................ 8,150 (12,218) (1,249)
--------- --------- ---------
Net cash provided by (used for) operating activities..................... 6,012 5,912 (5,945)
--------- --------- ---------
Cash Flows from Investing Activities:
Proceeds, net of transaction costs, from sale of businesses.................... -- 16,766 1,835
Capital expenditures........................................................... (6,301) (6,244) (8,988)
Capitalized software costs..................................................... (22) (1,345) (1,957)
Other.......................................................................... 139 33 117
--------- --------- ---------
Net cash provided by (used for) investing activities..................... (6,184) 9,210 (8,993)
--------- --------- ---------
Cash Flows from Financing Activities:
Additions to debt.............................................................. 2,500 -- 13,800
Retirements of debt............................................................ (958) (16,871) (621)
Proceeds from stock issuances.................................................. 355 2,199 3,158
Dividends paid................................................................. (695) (695) (695)
--------- --------- ---------
Net cash provided by (used for) financing activities..................... 1,202 (15,367) 15,642
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. 1,030 (245) 704
Cash and cash equivalents at beginning of year................................... 4,344 5,374 5,129
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 5,374 $ 5,129 $ 5,833
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL IN
PREFERRED COMMON EXCESS OF RETAINED TREASURY
STOCK STOCK PAR VALUE EARNINGS STOCK TOTAL
----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992.................... $ 695 $ 136 $ 24,618 $ 18,014 $ (7,447) $ 36,016
Exercise of stock options and other............ -- 2 356 -- (3) 355
Shares contributed to employee benefit plans... -- -- -- -- 1,551 1,551
Dividends on preferred stock--
$1 per share.................................. -- -- -- (695) -- (695)
Net loss....................................... -- -- -- (7,906) -- (7,906)
--- --- ----------- --------- --------- ---------
Balances at December 31, 1993.................... 695 138 24,974 9,413 (5,899) 29,321
Exercise of stock options...................... -- 8 2,191 -- -- 2,199
Shares contributed to employee benefit plans
and other..................................... -- -- -- -- 1,295 1,295
Income tax benefit from employee stock
transactions.................................. -- -- 695 -- -- 695
Dividends on preferred stock--
$1 per share.................................. -- -- -- (695) -- (695)
Net income..................................... -- -- -- 5,953 -- 5,953
--- --- ----------- --------- --------- ---------
Balances at December 31, 1994.................... 695 146 27,860 14,671 (4,604) 38,768
Stock issuance................................. -- -- 1,413 -- 912 2,325
Exercise of stock options...................... -- 5 1,209 -- (381) 833
Shares contributed to employee benefit plans... -- -- 322 -- 549 871
Income tax benefit from employee stock
transactions.................................. -- -- 344 -- -- 344
Dividends on preferred stock--
$1 per share.................................. -- -- -- (695) -- (695)
Net loss....................................... -- -- -- (3,807) -- (3,807)
--- --- ----------- --------- --------- ---------
Balances at December 31, 1995.................... $ 695 $ 151 $ 31,148 $ 10,169 $ (3,524) $ 38,639
--- --- ----------- --------- --------- ---------
--- --- ----------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. The Titan Corporation provides engineering,
technical, management and consulting services in the areas of national security,
software systems, communication systems, advanced research and development,
sterilization and the environment. The Company also develops, designs,
manufactures and markets satellite communications subsystems, secure television
security systems, pulse power products including linear accelerators, and
hardened electronic subsystems.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of The Titan Corporation ("Titan" or "the Company") and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated. Also, certain prior year amounts have been reclassified to conform
to the 1995 presentation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
START-UP ACTIVITIES. The Company is involved in a number of start-up
ventures, most notably secure television, commercial satellite communications
and medical device sterilization. Certain investments made in these start-up
ventures are reflected in the balance sheet, primarily within the captions of
Property and Equipment and Other Assets, which includes capitalized software
costs. These capitalized investments aggregate approximately $12,500 at December
31, 1995. These start-up ventures are in various early growth stages and have
not yet generated sufficient revenues to achieve profitability. At this time,
management plans to continue to invest in these ventures and will review and
evaluate the realizability of the related assets.
REVENUE RECOGNITION. A majority of the Company's revenue, both commercial
and government, is derived from products manufactured and services performed
under cost-reimbursement and fixed-price contracts wherein revenues are
generally recognized using the percentage-of-completion method. Certain other
revenues are recognized as units are delivered. Estimated contract losses are
fully charged to operations when identified.
CASH EQUIVALENTS. All highly liquid investments purchased with a maturity
of three months or less are classified as cash equivalents.
INVENTORIES. Inventories include the cost of material, labor and overhead,
and are stated at the lower of cost, determined on the first-in, first-out
(FIFO) and weighted average methods, or market.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is provided using the straight-line method, with estimated useful
lives of 2 to 15 years for leasehold improvements and 3 to 7 years for machinery
and equipment and furniture and fixtures. Certain machinery and equipment in the
Company's medical sterilization business is depreciated based on units of
production.
GOODWILL. The excess of the cost over the fair value of net assets of
purchased businesses ("goodwill") is amortized on a straight-line basis over
varying lives ranging from 5 to 20 years. The Company periodically re-evaluates
the original assumptions and rationale utilized in the establishment of the
carrying value and estimated lives of these assets. The criteria used for these
evaluations include management's estimate of the asset's continuing ability to
generate positive income from operations and positive cash flow in future
periods as well as the strategic significance of the intangible asset to the
Company's business objectives.
CAPITALIZED SOFTWARE COSTS. The Company's policy is to amortize capitalized
software costs over the greater of (a) the ratio that current gross revenues for
a product bears to the total of current and amortized future gross revenues for
that product, or (b) the straight-line method over the remaining estimated
economic life of the product including the period being reported on.
Notwithstanding the above, the maximum amortization period is four years.
F-7
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
It is reasonably possible that those estimates of anticipated future gross
revenues, the remaining estimated economic life of the product, or both, could
be reduced in the future which could significantly impact the carrying amount of
the capitalized software costs.
INCOME TAXES. Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), which requires the use of the liability method of accounting for deferred
income taxes. Under this method, deferred income taxes are recorded to reflect
the tax consequences on future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end.
If it is more likely than not that some portion or all of a deferred tax asset
will not be realized, a valuation allowance is recognized.
PER SHARE INFORMATION. Per share information is based on the weighted
average number of common shares and all dilutive common share equivalents
outstanding (11,739,000 in 1993, 13,288,000 in 1994, and 13,445,000 in 1995).
Common stock equivalents consist primarily of shares issuable upon the exercise
of stock options. Conversion of preferred stock has not been assumed as the
effect of the conversion would not be dilutive in any of the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board
("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". This statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. The FASB has also issued
SFAS No. 123 "Accounting for Stock-Based Compensation". This Statement (No. 123)
provides companies the option to account for employee stock compensation awards
based on their estimated fair value at the date of grant, resulting in a charge
to income in the period the awards are granted, or to present pro forma footnote
disclosure describing the effect to the Company's net income and net income per
share data as if the Company had adopted SFAS 123. SFAS 121 and SFAS 123 are
effective for companies with fiscal years beginning after December 15, 1995. The
Company has not yet determined what impact, if any, the adoption of SFAS 121 or
SFAS 123 will have on the Company's financial statements or related disclosures
thereto.
2. RESTRUCTURING
In early 1994, Titan sold its Applications Group (its Army training and
simulation service business) as part of a formal plan of restructuring adopted
at that time. The sale resulted in a pre-tax gain of approximately $12,700 and
generated net cash proceeds of approximately $17,000. The gain on sale was
substantially offset by provisions made for the estimated costs of planned
disposals and/or consolidations of certain operations deemed not compatible with
the Company's long range strategy at that time. Such strategy was primarily
reliant upon Titan internally funding the product development efforts and
commercialization activities relating to its start-up ventures.
The Board of Directors adopted a new formal plan of restructuring for 1995
that redefined Titan's businesses into four business segments: Communications
Systems, Software Systems, Defense Systems, and Emerging Technologies.
Implementation of this restructuring plan provides for further disposition of
businesses not central to the Company's long-term strategy as currently defined.
Management believes these actions will better position the Company for growth
and strategic transactions designed to increase shareholder value. The
restructuring charge of $5,431 also provides for significant reorganization of
the Software Systems segment and the sterilization business, reductions of
personnel, and other actions associated with reorganizing the structure of the
Company.
As explained above, Titan has historically funded growth for new business
areas with internally generated funds, its bank line of credit and certain
secured long-term debt. Presently, the Company intends to pursue various
financing alternatives in order to provide additional funding for the
development and commercialization of its emerging business areas. In
management's opinion, the need for and the timing of these further restructuring
F-8
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
2. RESTRUCTURING (CONTINUED)
activities were largely driven by management's plan to gain access to capital
markets as a significant source of continued development funding. Should the
Company be unable to successfully obtain outside funding, the level of
investment in these emerging businesses could change.
The restructuring charge of $5,431 includes approximately $2,000 for
severance which provides for the termination of a total of 84 employees
throughout the Company. As of December 31, 1995, 12 employees had been
terminated and a total of $318 had been charged against the accrual. The
restructuring charge also includes approximately $3,400 for the exiting of
businesses, which is net of a $1,450 pre-tax gain on the sale in September 1995
of the Company's shaped-charge munitions business. The charge includes estimates
for direct costs of the planned disposals, termination of certain agreements,
and other costs associated with selling or closing certain businesses. A total
of $461 had been charged against the accrual as of December 31, 1995. This group
of businesses had revenues of $19,384 and an operating loss of $298 in 1995.
3. OTHER FINANCIAL DATA
Following are details concerning certain balance sheet accounts:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Accounts Receivable:
U.S. Government--billed......................................................... $ 20,176 $ 14,449
U.S. Government--unbilled....................................................... 9,224 10,758
Trade........................................................................... 7,176 14,447
Less allowance for doubtful accounts............................................ (412) (294)
--------- ---------
$ 36,164 $ 39,360
--------- ---------
--------- ---------
</TABLE>
Unbilled receivables include approximately $5,000 at December 31, 1994 and
1995 representing work-in-process which will be billed in accordance with
contract terms and delivery schedules. Also included in unbilled receivables are
amounts billable upon final execution of contracts, contract completion,
milestones or completion of rate negotiations. Generally, unbilled receivables
are expected to be collected within one year. Payments to the Company for
performance on certain U.S. Government contracts are subject to audit by the
Defense Contract Audit Agency. Revenues have been recorded at amounts expected
to be realized upon final settlement.
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Inventories:
Materials...................................................................... $ 2,921 $ 3,152
Work-in-process................................................................ 1,287 4,159
Finished goods................................................................. 2,947 3,088
--------- ---------
$ 7,155 $ 10,399
--------- ---------
--------- ---------
Property and Equipment:
Machinery and equipment........................................................ $ 21,619 $ 23,429
Furniture and fixtures......................................................... 3,307 3,207
Leasehold improvements......................................................... 2,818 3,503
Construction in progress....................................................... 1,968 6,041
--------- ---------
29,712 36,180
Less accumulated depreciation and amortization................................. (16,780) (17,885)
--------- ---------
$ 12,932 $ 18,295
--------- ---------
--------- ---------
</TABLE>
Deferred income taxes of $5,501 and $5,904 and capitalized software costs of
$1,345 and $3,088 are included in Other Assets at December 31, 1994 and 1995,
respectively. At December 31, 1994 and 1995, respectively, other
F-9
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
3. OTHER FINANCIAL DATA (CONTINUED)
liabilities, current and non-current, include $2,185 and $958 related to
estimated losses on contracts. In addition, these captions include liabilities
for post-retirement benefits for employees of previously discontinued operations
of $3,134 and $3,016 at December 31, 1994 and 1995, respectively. Also included
in other accrued liabilities are customer advance payments of approximately
$1,503 and $1,653 at December 31, 1994 and 1995, respectively, and $3,814 and
$4,914 related to restructuring activities at December 31, 1994 and 1995,
respectively.
4. SEGMENT INFORMATION
In 1995, Titan classified its businesses in four industry segments,
Communications Systems, Software Systems, Defense Systems, and Emerging
Technologies. This change from prior years more clearly reflects the nature of
the Company's operations after restructuring. All prior year segment data have
been restated to conform to the 1995 presentation. The Communications Systems
segment contains two start-up business units, both targeting rapidly growing
commercial markets. The first business unit, secure television, specializes in
providing complete turnkey security for television delivery systems. The second
business unit is satellite communications, which develops, manufactures and
sells satellite earth station networks and related subsystems. The Software
Systems segment provides custom and semi-custom software development services to
assist customers in moving from older mainframe systems to distributed computing
systems utilizing client/server software. The Defense Systems segment, serving
primarily the U.S. Government, includes satellite communications products; test
and evaluation of complex systems; management and technical consulting; training
and simulation support; and other consulting and engineering services. The
Defense Systems segment also provides militarized computers. The Emerging
Technologies segment contains a group of businesses including the start-up
medical product sterilization services and systems and environmental consulting
services businesses as well as several established businesses generally involved
in broad-based technology development primarily for the U.S. Government.
Substantially all operations are located in the United States. Export revenues
amounted to approximately $16,289, $8,498, and $14,240 in 1993, 1994 and 1995,
respectively, primarily to countries in Western Europe and the Far East.
The following tables summarize industry segment data for 1993, 1994 and
1995.
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Communications Systems............................................ $ 6,492 $ 6,319 $ 7,490
Software Systems.................................................. 13,713 28,868 33,175
Defense Systems................................................... 103,071 78,780 67,948
Emerging Technologies............................................. 26,138 22,239 25,354
---------- ---------- ----------
$ 149,414 $ 136,206 $ 133,967
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Sales to the United States Government, including both defense and
non-defense agencies, and sales as a subcontractor as well as direct sales,
aggregated approximately $112,001 in 1993, $93,107 in 1994, and $81,632 in 1995.
In the Defense Systems segment, revenues in 1994 and 1995 included approximately
$9,700 and $18,300, respectively, for work subcontracted to the buyer of the
Applications Group which was sold in April 1994. There was no operating profit
associated with these revenues. This contract is expected to conclude in
mid-1996. Furthermore, 1995 Defense Systems revenues and operating profit
included approximately $1,400 recovered from a termination for convenience claim
with the U.S. Government for work performed in prior years. Within the
F-10
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
4. SEGMENT INFORMATION (CONTINUED)
Software Systems segment, sales to one customer, a telephone company, totalled
$9,712, $24,323, and $24,451, in 1993, 1994 and 1995, respectively. No other
single customer accounted for 10% or more of the consolidated revenues for these
years. Intersegment sales were not significant in any year.
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Profit (Loss):
Communications Systems............................................... $ (7,413) $ (7,927) $ (4,488)
Software Systems..................................................... 915 6,237 3,803
Defense Systems...................................................... (2,804) 4,725 4,456
Emerging Technologies................................................ 947 (305) 14
Corporate............................................................ (6,292) 6,905 (7,740)
--------- --------- ---------
$ (14,647) $ 9,635 $ (3,955)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Defense Systems segment includes Applications Group revenue of $31,700
and $11,913 and operating profit of $3,300 and $919 in the full year 1993 and in
1994 through the date of sale, respectively.
Corporate includes corporate general and administrative expenses, certain
Corporate restructuring charges, and gains or losses from the sale of
businesses. Corporate general and administrative expenses are generally
recoverable from contract revenues by allocation to operations.
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Identifiable Assets:
Communications Systems............................................... $ 3,649 $ 4,813 $ 8,287
Software Systems..................................................... 3,458 6,084 8,945
Defense Systems...................................................... 58,625 38,859 39,587
Emerging Technologies................................................ 9,866 12,165 19,191
General corporate assets............................................. 17,616 19,982 19,160
--------- --------- ---------
$ 93,214 $ 81,903 $ 95,170
--------- --------- ---------
--------- --------- ---------
</TABLE>
General corporate assets are principally cash, prepaid expenses, deferred
income taxes, and other assets.
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Depreciation and Amortization of Property and Equipment, Goodwill, and
Other Assets:
Communications Systems................................................... $ 177 $ 387 $ 366
Software Systems......................................................... 715 533 1,044
Defense Systems.......................................................... 2,813 1,838 1,744
Emerging Technologies.................................................... 756 630 712
Corporate................................................................ 34 36 251
--------- --------- ---------
$ 4,495 $ 3,424 $ 4,117
--------- --------- ---------
--------- --------- ---------
Capital Expenditures:
Communications Systems................................................... $ 56 $ 397 $ 697
Software Systems......................................................... 562 1,784 1,709
Defense Systems.......................................................... 1,598 2,003 1,431
Emerging Technologies.................................................... 4,046 1,963 5,007
Corporate................................................................ 39 97 144
--------- --------- ---------
$ 6,301 $ 6,244 $ 8,988
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-11
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
5. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). This
statement changed the criteria for the recognition and measurement of deferred
tax assets and liabilities, including net operating loss carryforwards. Prior
years' financial statements were not restated to apply the provisions of SFAS
109. The cumulative effect of the adoption of the accounting change was an
increase in 1993 net income of $1,700 ($0.14 per share) relating to the
recognition of additional net deferred tax assets.
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal................................................................ $ (2,334) $ 1,377 $ (2,232)
State.................................................................. -- 203 (220)
--------- --------- ---------
(2,334) 1,580 (2,452)
Deferred................................................................. (4,213) 1,470 1,245
--------- --------- ---------
$ (6,547) $ 3,050 $ (1,207)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Following is a reconciliation of the income tax provision (benefit) expected
(based on the United States federal income tax rate applicable in each year) to
the actual tax provision (benefit) on income (loss):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Expected Federal tax provision (benefit)................................. $ (5,492) $ 3,061 $ (1,705)
State income taxes, net of Federal income tax benefits................... (540) 450 (44)
Loss carryforwards/carrybacks............................................ -- (216) --
Research credit.......................................................... (570) (338) --
Goodwill amortization.................................................... 15 149 160
Alternative minimum tax.................................................. -- -- 100
Keyman life insurance.................................................... 60 83 75
Other.................................................................... (20) (139) 207
--------- --------- ---------
Actual tax provision (benefit)........................................... $ (6,547) $ 3,050 $ (1,207)
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1993, the Revenue Reconciliation Act of 1993 was signed into law
which reinstated research tax credits retroactive to July 1, 1992. The
retroactive application of the law increased the Company's 1992 research credit
by $570 which is reflected in the income tax provision for the year ended
December 31, 1993.
The deferred tax assets as of December 31, 1994 and 1995, result from the
following temporary differences:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Inventory and contract loss reserves.............................................. $ 4,102 $ 3,005
Employee benefits................................................................. 4,518 4,289
Restructuring..................................................................... 2,534 2,786
Tax credit carryforwards.......................................................... 1,315 815
Depreciation...................................................................... (1,664) (1,875)
Loss carryforward................................................................. 429 1,680
Other............................................................................. 236 1,213
--------- ---------
11,470 11,913
Valuation allowance............................................................... (1,200) (1,200)
--------- ---------
Net deferred tax assets........................................................... $ 10,270 $ 10,713
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
5. INCOME TAXES (CONTINUED)
Realization of certain components of the net deferred tax asset is dependent
on Titan generating sufficient taxable income prior to expiration of loss and
credit carryforwards. Although realization is not assured, management believes
it is more likely than not that the net deferred tax asset will be realized. The
amount of the net deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are changed. Also, under Federal tax law, certain potential
changes in ownership of the Company which may not be within the Company's
control may limit annual future utilization of these carryforwards.
Net tax refunds in 1995 were $828. Cash paid for income taxes was $309 and
$1,252 in 1993 and 1994, respectively.
6. DEBT
At December 31, 1995, the Company had debt outstanding of $9,200 under an
unsecured bank line of credit at a weighted average interest rate of 8.13%. The
Company also had commitments under letters of credit at December 31, 1995 of
$1,070 which reduced availability of the line of credit. In May 1995, this bank
line of credit was increased to $17,000 from $10,000 and the maturity date was
extended from May 1996 to May 1997. The Company has the option to borrow at
prime or at LIBOR plus 2 percent. The line of credit agreement requires Titan to
have annual net income, as defined, prohibits two consecutive quarterly losses
and contains other financial covenants which require the Company to maintain
stipulated levels of tangible net worth, a minimum debt service coverage ratio
and a specified quick ratio. A waiver was received relating to the 1995 net
loss. No borrowings were outstanding under this agreement at December 31, 1994.
Borrowings under the Company's lines of credit averaged $14,200, $4,180, and
$6,400 at weighted average interest rates of 5.5%, 7.6% and 8.8% during 1993,
1994 and 1995, respectively.
At December 31, 1994 and 1995 the Company had $1,321 and $5,300,
respectively, outstanding under two promissory notes, secured by certain
machinery and equipment. The interest rates of the notes are 8.56% and 8.5%. In
January 1996, the Company entered into another loan agreement for $2,500 at an
interest rate of 7.42%, also secured by machinery and equipment. Part of the
proceeds from this agreement were used to repay one of the promissory notes
outstanding at December 31, 1995 with a principal balance of $765.
Cash paid for interest, primarily on these borrowings, was $1,274, $578, and
$572 in 1993, 1994 and 1995, respectively.
7. COMMITMENTS AND CONTINGENCIES
Titan is obligated for aggregate rentals of $41,609 under operating lease
agreements, principally for facilities. These leases generally include renewal
options and require minimum payments of $5,426 in 1996, $4,936 in 1997, $4,452
in 1998, $3,810 in 1999, $3,475 in 2000 and $19,510 for the years thereafter.
Rental expense under these leases was $6,294 in 1993, $7,367 in 1994 and $7,496
in 1995. The Company has entered into a long-term lease agreement for facilities
which are owned by an entity in which the Company has a minority ownership
interest. Rental expense in 1993, 1994 and 1995 includes $824, $838, and $868,
respectively, paid under this agreement.
The Company is a party to four separate lawsuits filed by former employees
claiming, among other things, wrongful termination and discrimination. The cases
are scheduled for trial in March, April and June of 1996. The Company intends to
continue to defend the cases vigorously. While it is not feasible to predict the
outcome of these cases, management believes that their ultimate disposition will
not have a material adverse effect on the financial position or results of
operations of the Company.
F-13
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the ordinary course of business, defense contractors are subject to many
levels of audit and investigation by various government agencies. Further, the
Company and its subsidiaries are subject to claims and from time to time are
named as defendants in legal proceedings. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position or results of operations of the Company.
8. PREFERRED STOCK
Each share of $1.00 cumulative convertible preferred stock is entitled to
1/3 vote, annual dividends of $1 per share and is convertible at any time into
2/3 share of the Company's common stock. Common stock of 463,248 shares has been
reserved for this purpose. Upon liquidation, the $1.00 cumulative convertible
preferred stockholders are entitled to receive $20 per share, plus cumulative
dividends in arrears, before any distribution is made to the common
stockholders.
9. COMMON STOCK
At December 31, 1995, aggregate common shares reserved for future issuance
for conversion of preferred stock, all stock incentive plans and warrants were
2,792,568.
On August 17, 1995, the Board of Directors adopted a Shareholder Rights
Agreement and subsequently distributed one preferred stock purchase right
("Right") for each outstanding share of the Company's common stock. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Junior Participating Preferred Stock, par value $1.00 per
share (the "Preferred Shares") at a price of $42.00 per one one-hundredth of a
Preferred Share, subject to adjustment. The Rights become exercisable if a
person or group acquires, in a transaction not approved by the Company's Board
of Directors ("Board"), 15% or more of the Company's common stock or announces a
tender offer for 15% or more of the stock.
If a person or group acquires 15% or more of the Company's common stock,
each Right (other than Rights held by the acquiring person or group which become
void) will entitle the holder to receive upon exercise a number of shares of
Company common stock having a market value of twice the Right's exercise price.
If the Company is acquired in a transaction not approved by the Board, each
Right may be exercised for common shares of the acquiring company having a
market value of twice the Right's exercise price. The Company may redeem the
Rights at $.01 per Right, subject to certain conditions. The Rights expire on
August 17, 2005.
In September 1995, the Company completed a private placement of 300,000
shares of its common stock, receiving net proceeds of $2,325. Treasury shares
were used for the issuance. The Company's shares were placed with offshore
institutional investors pursuant to Regulation S under the Securities Act of
1933, as amended.
10. STOCK INCENTIVE PLANS
At December 31, 1995, 1,218,811 shares of common stock were reserved for
options granted under Titan's stock option plans for officers, directors and key
employees. Options vest ratably over 4 years and expire up to 10 years from the
date granted. The option price must not be less than the fair market value on
the date of grant, and the provisions covering exercise are established at the
date of grant by the option committee.
F-14
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
10. STOCK INCENTIVE PLANS (CONTINUED)
A summary of changes in the shares under option is shown below:
<TABLE>
<CAPTION>
SHARES
ISSUABLE
UNDER OPTIONS
OUTSTANDING PRICE RANGE
------------- -------------
<S> <C> <C>
Balance at December 31, 1992............................................. 1,837,014 $ 1.63--4.25
Options granted........................................................ 536,500 2.63--3.50
Options exercised...................................................... (129,716) 1.63--3.25
Options terminated..................................................... (223,436) 1.63--4.25
-------------
Balance at December 31, 1993............................................. 2,020,362 1.63--4.25
Options granted........................................................ 369,000 2.63--6.63
Options exercised...................................................... (855,212) 1.63--4.25
Options terminated..................................................... (104,694) 1.63--4.25
-------------
Balance at December 31, 1994............................................. 1,429,456 1.63--6.63
Options granted........................................................ 429,000 5.75--9.50
Options exercised...................................................... (454,629) 1.63--7.13
Options terminated..................................................... (185,016) 1.63--6.63
-------------
Balance at December 31, 1995............................................. 1,218,811 2.13--9.50
-------------
-------------
</TABLE>
At December 31, 1994, and 1995, respectively, options for 568,816 and
451,521 shares were exercisable, and 814,706 and 509,944 shares were reserved
for the granting of additional options in the future.
11. BENEFIT PLANS
The Company has various defined contribution benefit plans covering certain
employees. The Company's contributions to these plans were $2,713, $2,291, and
$2,514 in 1993, 1994 and 1995, respectively. The Company's discretionary
contributions to its Employee Stock Ownership Plan were $487 and $339 in 1993
and 1994, respectively. There were no discretionary contributions for 1995.
During 1993, 1994 and 1995, the Company utilized treasury stock of $1,551,
$1,267, and $871, respectively, for benefit plan contributions.
The Company has a non-qualified executive deferred compensation plan for
certain officers and key employees. The Company's expense for this plan was
$680, $668, and $970 in 1993, 1994, and 1995, respectively. At December 31, 1994
and 1995, respectively, Other Non-current Liabilities include $2,466 and $2,975
for obligations under this plan. Interest expense for the years ended December
31, 1993, 1994, and 1995 includes $191, $229, and $486, respectively, related to
the plan. The Company also has performance bonus plans for certain of its
employees. Related expense amounted to approximately $1,708, $5,220 and $2,679
in 1993, 1994 and 1995, respectively.
The Company has previously provided for post-retirement benefit obligations
of operations discontinued in prior years. The Company has no post-retirement
benefit obligations for any of its continuing operations.
F-15
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1994 QUARTER QUARTER (A) QUARTER QUARTER TOTAL YEAR
- -------------------------------------------------- ------- ----------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $39,689 $28,804 $29,541 $38,172 $ 136,206
Gross profit...................................... 8,249 7,400 9,382 11,254 36,285
Net income........................................ 751 1,773 1,514 1,915 5,953
Net income per common share....................... .05 .12 .10 .13 .40
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER (B) TOTAL YEAR
- -------------------------------------------------- ------- ------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $30,165 $34,307 $34,983 $34,512 $ 133,967
Gross profit...................................... 8,464 9,222 7,346 6,704 31,736
Net income (loss)................................. 535 719 470 (5,531) (3,807)
Net income (loss) per common share................ .03 .04 .02 (.41) (.33)
</TABLE>
- -------------------
(a) Net income in the second quarter of 1994 includes a net restructuring credit
of $1,200.
(b) Net loss in the fourth quarter of 1995 includes a net restructuring charge
(see Note 2 of Notes to Consolidated Financial Statements).
The above financial information for each quarter reflects all normal and
recurring adjustments.
F-16
<PAGE>
THE TITAN CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues................................................................................... $ 64,472 $ 60,334
--------- ---------
Costs and expenses:
Cost of revenues......................................................................... 46,786 46,966
Selling, general and administrative expense.............................................. 11,821 12,219
Research and development expense......................................................... 3,475 2,379
--------- ---------
Total costs and expenses............................................................. 62,082 61,564
--------- ---------
Operating profit (loss).................................................................... 2,390 (1,230)
Interest expense........................................................................... (469) (1,157)
Interest income............................................................................ 43 18
--------- ---------
Income (loss) before income taxes.......................................................... 1,964 (2,369)
Income tax provision (benefit)............................................................. 710 (758)
--------- ---------
Net income (loss).......................................................................... 1,254 (1,611)
Dividend requirements on preferred stock................................................... 347 366
--------- ---------
Net income (loss) applicable to common stock............................................... $ 907 $ (1,977)
--------- ---------
--------- ---------
Average common shares outstanding.......................................................... 13,836 14,418
--------- ---------
--------- ---------
Net income (loss) per average common share................................................. $ .07 $ (.14)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-17
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUES)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 5,833 $ 3,586
Accounts receivable--net...................................................... 39,360 41,519
Inventories................................................................... 10,399 13,761
Prepaid expenses and other.................................................... 2,872 3,708
Deferred income taxes......................................................... 4,809 5,194
------------ -----------
Total current assets...................................................... 63,273 67,768
Property and equipment--net..................................................... 18,295 21,022
Goodwill--net................................................................... 3,550 22,728
Other assets.................................................................... 10,052 9,966
------------ -----------
Total assets.............................................................. $95,170 $121,484
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $10,184 $ 10,831
Lines of credit............................................................... 9,200 18,586
Note payable to shareholder................................................... -- 1,000
Income taxes payable.......................................................... -- 654
Accrued compensation and benefits............................................. 9,192 7,981
Other accrued liabilities..................................................... 13,803 12,358
Current portion of long-term debt............................................. 1,019 1,066
------------ -----------
Total current liabilities................................................. 43,398 52,476
------------ -----------
Long-term debt.................................................................. 4,281 6,634
Other non-current liabilities................................................... 8,852 10,285
Series B cumulative convertible redeemable preferred stock, $3,000
liquidation preference, 6% cumulative annual dividend, 500,000 shares
issued and outstanding......................................................... -- 3,000
Stockholders' equity:
Preferred stock; $1 par value; authorized 2,500,000 shares:
Cumulative convertible, $13,897 liquidation preference: 694,872 shares issued
and outstanding.............................................................. 695 695
Series A junior participating: none issued.................................... -- --
Common stock; $.01 par value; authorized 30,000,000 shares;
issued and outstanding:
15,087,087 and 17,115,389.................................................. 151 171
Capital in excess of par value................................................ 31,148 43,328
Retained earnings............................................................. 10,169 8,192
Treasury stock (1,161,147 and 1,074,884 shares), at cost...................... (3,524) (3,297)
------------ -----------
Total stockholders' equity................................................ 38,639 49,089
------------ -----------
Total liabilities and stockholders' equity................................ $95,170 $121,484
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
THE TITAN CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss).......................................................................... $ 1,254 $ (1,611)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization............................................................ 2,057 2,541
Deferred income taxes and other.......................................................... 362 (645)
Changes in assets and liabilities, net of effects from businesses acquired:
Accounts receivable.................................................................... 35 9,782
Inventories............................................................................ (1,308) (3,315)
Prepaid expenses and other assets...................................................... 1,479 (993)
Accounts payable....................................................................... (1,929) (774)
Accrued compensation and benefits...................................................... (2,253) (2,999)
Restructuring activities............................................................... -- (2,269)
Other liabilities...................................................................... (6,105) (2,964)
--------- ---------
Net cash used for operating activities............................................. (6,408) (3,247)
--------- ---------
Cash Flows From Investing Activities:
Capital expenditures....................................................................... (3,028) (3,006)
Capitalized software costs................................................................. (804) (1,389)
Payment for purchase of businesses, net of cash acquired................................... -- (1,000)
Other...................................................................................... -- 44
--------- ---------
Net cash used for investing activities............................................. (3,832) (5,351)
--------- ---------
Cash Flows From Financing Activities:
Additions to debt.......................................................................... 7,550 7,961
Retirements of debt........................................................................ (272) (1,534)
Dividends paid............................................................................. (347) (366)
Proceeds from stock issuances.............................................................. 428 290
--------- ---------
Net cash provided by financing activities.......................................... 7,359 6,351
--------- ---------
Net decrease in cash and cash equivalents.................................................... (2,881) (2,247)
Cash and cash equivalents at beginning of period............................................. 5,129 5,833
--------- ---------
Cash and cash equivalents at end of period................................................... $ 2,248 $ 3,586
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-19
<PAGE>
THE TITAN CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
CONVERTIBLE CAPITAL IN
PREFERRED COMMON EXCESS OF RETAINED TREASURY
STOCK STOCK PAR VALUE EARNINGS STOCK TOTAL
------------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1995
Balances at December 31, 1994................. $ 695 $ 146 $ 27,860 $ 14,671 $ (4,604) $ 38,768
Exercise of stock options and other......... -- 3 806 -- (388) 421
Shares contributed to employee benefit
plans...................................... -- -- -- -- 361 361
Dividends on preferred stock--$.50 per
share...................................... -- -- -- (347) -- (347)
Net income.................................. -- -- -- 1,254 -- 1,254
--- --- ----------- --------- --------- ---------
Balances at June 30, 1995..................... $ 695 $ 149 $ 28,666 $ 15,578 $ (4,631) $ 40,457
--- --- ----------- --------- --------- ---------
--- --- ----------- --------- --------- ---------
SIX MONTHS ENDED JUNE 30, 1996
Balances at December 31, 1995................. $ 695 $ 151 $ 31,148 $ 10,169 $ (3,524) $ 38,639
Stock issuance for acquisition.............. -- 19 11,510 -- -- 11,529
Exercise of stock options................... -- 1 351 -- (62) 290
Shares contributed to employee benefit
plans...................................... -- -- 319 -- 289 608
Dividends on preferred stock--
Cumulative convertible, $.50 per share..... -- -- -- (347) -- (347)
Series B, 6% annual......................... -- -- -- (19) -- (19)
Net loss.................................... -- -- -- (1,611) -- (1,611)
--- --- ----------- --------- --------- ---------
Balances at June 30, 1996..................... $ 695 $ 171 $ 43,328 $ 8,192 $ (3,297) $ 49,089
--- --- ----------- --------- --------- ---------
--- --- ----------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-20
<PAGE>
THE TITAN CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF FINANCIAL STATEMENT PREPARATION
The accompanying consolidated financial information of The Titan Corporation
and its subsidiaries ("the Company" or "Titan") should be read in conjunction
with the Notes to Consolidated Financial Statements contained in the Company's
Annual Report on Form-10K to the Securities and Exchange Commission for the year
ended December 31, 1995. The accompanying financial information includes all
subsidiaries on a consolidated basis and all normal recurring adjustments which
are considered necessary by the Company's management for a fair presentation of
the financial position and results of operations for the periods presented.
However, these results are not necessarily indicative of results for a full
year. Also, certain prior year amounts have been reclassified to conform to the
1996 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITION
On May 24, 1996, the Company completed the acquisition of three
privately-held affiliated businesses--Eldyne, Inc. ("Eldyne"), Unidyne
Corporation ("Unidyne") and Diversified Control Systems, LLC ("DCS"). Eldyne,
Unidyne, and DCS are information technology businesses that provide the
Department of Defense and other government customers with systems research,
development and prototyping, fleet integration, insertion of technology into
existing systems, control systems and life cycle support. The overall
transaction consideration consisted of $1 million cash, 1,921,534 shares of
Titan common stock with an assigned value of $6.00 per share, the issuance of
500,000 shares of a new class of cumulative convertible redeemable preferred
stock (see Note 4), assumption of indebtedness (see Note 3), and a promissory
note for $1 million issued to Jack Witt, the principal stockholder of the
acquired companies. The Company also entered into a retainer agreement for the
services of Mr. Witt, providing for an annual retainer of $.3 million, payable
monthly, for 6 years beginning May 24, 1996. Other direct costs will approximate
$3 million. The note is due on March 15, 1997, and interest of 10% per annum is
due quarterly and at maturity.
The acquisition has been accounted for as a purchase, and, accordingly, the
Company's consolidated financial statements include the operating results of the
three acquired companies since May 24, 1996. The purchase agreements contain
certain terms that may require contingent payments by the Company or the seller
and/or return of the Company's common stock by the seller. Such payments would
be recorded as an adjustment to the purchase price. The excess of the purchase
price over the estimated fair value of net assets acquired of $19.5 million at
June 30, 1996 is being amortized using a straight-line method over 30 years.
Unaudited proforma data giving effect to the purchase of Eldyne, Unidyne and
DCS as if they had been acquired at the beginning of 1995 are shown below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues.......................................................................... $ 87,038 $ 89,157
Net income (loss)................................................................. 2,103 (3,145)
Net income (loss) per share....................................................... $ .11 $ (.22)
</TABLE>
F-21
<PAGE>
THE TITAN CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. ACQUISITION (CONTINUED)
The proforma net loss for the six months ended June 30, 1996 includes
certain unanticipated operating adjustments made to the Eldyne, Unidyne and DCS
historical financial statements including, but not limited to, long-term
contract earnings revisions, and changes to the carrying value of certain
assets, primarily receivables.
3. DEBT
At December 31, 1995 and June 30, 1996, the Company had debt outstanding of
$9,200 and $14,400, respectively, under a $17,000 bank line of credit. The
Company also had commitments under letters of credit at June 30, 1996 of $355
which reduced availability under the line of credit. The line of credit
agreement requires the Company to have annual net income, as defined, prohibits
two consecutive quarterly losses and contains other financial covenants which
require the Company to maintain stipulated levels of tangible net worth, a
minimum interest coverage ratio and a specified quick ratio. As of June 30,
1996, the Company was not in compliance with the covenants relating to
consecutive quarterly losses and ratios of total liabilities to tangible net
worth and minimum interest coverage. This noncompliance was waived by the
Company's bank, subject to the bank's right to secure the outstanding
obligations under the line of credit with the Company's assets, if it so
chooses.
In connection with the acquisition of Eldyne, Unidyne, and DCS, the
Company's Eldyne and Unidyne subsidiaries assumed and renegotiated a credit
agreement with Crestar Bank which provides for a working capital line of credit
facility, a mortgage note and an equipment note. At June 30, 1996, $4,186 was
outstanding under the line of credit at a rate of 8.2%. The agreement allows
borrowings on the line through December 31, 1996 at an interest rate of LIBOR
plus 2.75% and up to an aggregate of $7,000, limited by the sum of various
percentages of billed and unbilled government and commercial receivables. The
line is collateralized by substantially all of the assets of the acquired
companies, and borrowings up to $2,500 under the line have been guaranteed by
the Company. The credit agreement limits the use of advances of the line to
Eldyne and Unidyne. The mortgage note of $1,273 and the equipment note of $158
at June 30, 1996, are collateralized by real estate and equipment, bear interest
at LIBOR plus 2.5% and require monthly payments through February 15, 2000 and
1999, respectively.
The Crestar credit agreement contains, among other financial covenants,
provisions which require Eldyne and Unidyne to maintain stipulated levels of
tangible net worth, working capital and leverage. At June 30, 1996, the
companies were not in compliance with certain of these covenants. This
noncompliance was waived by the bank.
4. CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
In connection with the acquisition of Eldyne, Unidyne and DCS, the Company
issued 500,000 shares of Series B Cumulative Convertible Redeemable Preferred
Stock (the "Series B Preferred Stock"). The Series B Preferred Stock accrues
dividends at a rate of 6% per annum payable quarterly in arrears cumulatively,
has a liquidation preference of $6.00 per share plus accrued and unpaid
dividends (the "Series B Liquidation Preference") and entitles the holder
thereof to one vote per outstanding share, voting together as a class with the
holders of shares of outstanding Common Stock (and any other series or classes
entitled to vote therewith) on all matters submitted for a shareholder vote. The
Series B Preferred Stock is convertible at the holder's option into shares of
the Company's common stock at a conversion price of $9.00 per share (subject to
customary anti-dilution adjustments) on or after November 24, 1996 until
November 24, 1997. The Series B Preferred Stock also is redeemable at the Series
B Liquidation Preference (i) at the holder's option, after May 24, 1998 until
May 24, 2001, and (ii) at the Company's option, after May 24, 2001 until May 24,
2006. The Series B Preferred Stock is not considered a common stock equivalent
for the purpose of earnings per share calculations.
F-22
<PAGE>
THE TITAN CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. RESTRUCTURING
In 1995, the Company adopted a formal plan of restructuring that resulted in
charges of approximately $5,431 to provide for, among other things, disposition
of businesses not central to the Company's long-term strategy, as well as
related severance and other charges. During the first six months of 1996,
charges against restructuring reserves for severance were $607 related to 33
employees terminated throughout the Company. At June 30, 1996, approximately
$2,650 of the initial charges remained in other accrued liabilities. This
remaining balance was comprised of approximately $700 for further reductions in
personnel and approximately $1,950 for costs associated with the exiting of
businesses and the termination of certain agreements. This group of businesses
had revenues of $9,256 and operating profit of $1,898 for the six months ended
June 30, 1996.
6. SUBSEQUENT EVENT
On July 26, 1996, the Company sold its Electronics division, which was part
of the Defense Systems segment. The transaction will have no significant impact
on the 1996 results of operations.
7. OTHER FINANCIAL DATA
<TABLE>
<CAPTION>
DECMBER 31, JUNE 30,
1995 1996
------------ ---------
<S> <C> <C>
Inventories:
Materials................................................................ $ 3,152 $ 3,368
Work-in-process.......................................................... 4,159 7,727
Finished goods........................................................... 3,088 2,666
------------ ---------
$ 10,399 $ 13,761
------------ ---------
------------ ---------
</TABLE>
Supplemental disclosure of cash payments (receipts) is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Interest....................................................................... $ 207 $ 1,004
Income taxes................................................................... (804) (141)
</TABLE>
During the six month periods ended June 30, 1995 and 1996, the Company
utilized treasury stock of $361 and $608, respectively, for benefit plan
contributions.
F-23
<PAGE>
THE TITAN CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. OTHER FINANCIAL DATA (CONTINUED)
The following tables summarize revenues and operating profit (loss) by
industry segment for the six months ended June 30, 1995 and 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues:
Communications Systems.......................................................... $ 4,076 $ 1,841
Software Systems................................................................ 18,328 10,680
Defense Systems................................................................. 30,372 36,940
Emerging Technologies........................................................... 11,696 10,873
--------- ---------
$ 64,472 $ 60,334
--------- ---------
--------- ---------
Operating Profit (Loss):
Communications Systems.......................................................... $ (2,834) $ (4,292)
Software Systems................................................................ 5,072 134
Defense Systems................................................................. 2,361 4,727
Emerging Technologies........................................................... 282 (267)
--------- ---------
Segment operating profit before Corporate....................................... 4,881 302
Corporate....................................................................... (2,491) (1,532)
--------- ---------
$ 2,390 $ (1,230)
--------- ---------
--------- ---------
</TABLE>
F-24
<PAGE>
Dedicated Channel
Single active user
has full use of channel
[Graphic] - Single transmission per
channel at a given time
[Graphic]
- Other users must wait to
send until channel is clear
Time Division Multiple Access (TDMA) Channel is divided
into rigid time slots
- Transmissions are digitized
and interleaved, allowing
multiple transmissions per channel [Graphic]
[Graphic] - Transmissions are restricted to
pre-assigned time slots
However, all potential
- Users maintain their time slots, users have pre-assigned
even when not transmitting, time slots, so much of
leading to inefficient use the channel may go
of channel unused.
Manned Network
Controller
Demand Assigned Multiple Access (DAMA)
[Graphic] - Transmissions are digitized and Channel is dynamically
interleaved in channel arranged into slots of
variable length and
frequency
Unmanned Network - Time slots are generated [Graphic]
Controller dynamically by the network
control computer, as demanded Since transmission slots
by users are assigned only as they
are demanded by users,
efficient use of the
channel is maintained,
and more users can be
accommodated within the
channel.
[See Graphic Appendix]
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
No dealer, salesperson or other person has been authorized in connection
with any offering made hereby to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or by the Underwriter. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any security other than the
securities offered hereby, nor does it constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make any such offer in such
jurisdiction. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of the Company since such date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents By Reference........................... 3
Summary................................................................... 4
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 12
Price Range of Common Stock and Dividend Policy........................... 13
Capitalization............................................................ 14
Selected Consolidated Financial Data...................................... 15
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 16
Business.................................................................. 22
Management................................................................ 36
Principal Stockholders.................................................... 37
Description of Debentures................................................. 37
Description of Capital Stock.............................................. 43
Certain Federal Income Tax Consequences................................... 45
Underwriting.............................................................. 49
Legal Matters............................................................. 49
Independent Public Accountants............................................ 49
Index to Financial Statements............................................. F-1
</TABLE>
[LOGO]
------------------------
$30,000,000
% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2003
PROSPECTUS
, 1996
---------------------
DILLON, READ & CO. INC.
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
GRAPHIC IMAGE APPENDIX
1. The inside front cover contains the words "The Titan Corporation provides
sophisticated communications and information systems products and services to
large commercial and government customers" roughly in the middle of the page.
The page background is a collage of photographs related to the Company's
products and services. The photographs (clockwise from the upper left of the
page) contain the following images: (1) a man in a U.S. Navy uniform points
to a Titan Linkabit machine; (2) a man, woman and child watch a television
program; a "smart card" with Video PassPort and Titan Information Systems
logos is depicted in the bottom right of the picture; (3) a satellite dish at
Sunset; (4) a man and woman engage in conversation in front of a computer
monitor, which shows a map of the United States; (5) a man holds a telephone
receiver and stands in front of a satellite dish bearing a Titan Information
Systems logo; (6) a man looks at a computer monitor.
2. The inside back cover is divided into three rows of equal proportion and
two columns, with the left column being roughly twice the size of the right,
forming a total of six distinct areas on the page as follows: (1) the upper
left area contains a graphic representation of a satellite dish and telephone
transmitting up to a satellite, which in turn transmits down to a second
satellite dish and telephone; (2) the middle left area contains a graphic
representation of four satellite dishes and telephones, three of which are
transmitting up to a satellite. The graphic shows two-way transmission
between the satellite and a satellite dish labeled "Manned Network
Controller." The satellite also is shown transmitting down to three of four
satellite dishes and telephones; (3) the lower left area contains a graphic
of many satellite dishes and telephones transmitting up to a satellite. The
graphic shows two-way transmission between the satellite and a satellite dish
labeled "Unmanned Network Controller." The satellite also is shown
transmitting down to many satellite dishes and telephones; (4) the upper
right area contains a single continuous horizontal ring, with the number
"1" appearing in the front center of such ring; (5) the middle right area
contains two continuous horizontal rings, one above the other. The upper ring
is divided by vertical lines into spaces of equal proportion, in each of
which appears a different number across the front of the ring. In the lower
ring, several of the spaces are "blacked out"; and (6) the lower right area
contains a single continuous horizontal ring, which is subdivided into five
horizontal bands of equal proportion, and each such band is divided by
vertical lines into segments of unequal proportion.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of expenses incurred in connection
with this Registration Statement. All such expenses will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 11,897
NASD filing fee................................................... 3,950
Blue Sky fees and expenses........................................ 10,000
Public accountants' fees.......................................... 75,000
Company legal fees and expenses................................... 160,000
Printing expenses................................................. 75,000
Trustee fees...................................................... 10,000
Miscellaneous expenses............................................ 54,153
---------
Total........................................................... $ 400,000
---------
---------
</TABLE>
- -------------------
All of the above items except the registration fee and NASD filing fee are
estimates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement of such action, suit or proceeding, provided that
such officer or director acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the corporation's best interest,
and, for criminal proceedings, had no reasonable cause to believe his or her
conduct was illegal. A Delaware corporation may indemnify officers and directors
against expenses (including attorney's fees) in connection with the defense or
settlement of an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him or
her against the expenses which such officer or director actually and reasonably
incurred.
The Restated Certificate of Incorporation of Titan contains a provision to
limit the personal liability of the directors of Titan for violations of their
fiduciary duty, except to the extent such limitation of liability is prohibited
by the Delaware Law. This provision eliminates each director's liability to
Titan or its stockholders for monetary damages except (i) for any breach of the
director's duty of loyalty to Titan or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware Law providing for
liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions, or (iv) for any transaction from which a director
derived an improper personal benefit. The By-Laws of Titan provide that Titan
shall indemnify directors and officers to the fullest extent permitted by law.
The effect of these provisions is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
In addition, Titan has entered into indemnity agreements with its executive
officers and directors whereby the Company obligates itself to indemnify such
officers and directors from any amounts which the officer or director becomes
obligated to pay because of any claim made against him or her arising out of any
act or omission committed while he or she is acting in his or her capacity as a
director and/or officer of the Corporation.
II-1
<PAGE>
Titan maintains directors and officers liability insurance coverage that
insures its officers and directors against certain losses that may arise out of
their positions with the Corporation and insures the Corporation for liabilities
it may incur to indemnify its officers and directors.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of Indenture.
5.1 Opinion of Latham & Watkins.
10.1 Form of Fourth Amendment to the Commercial Loan Agreement entered into as of
September 6, 1996 by and between The Sumitomo Bank of California and The Titan
Corporation (incorporated by reference to Exhibit 10.1 to Registrant's
registration statement on Form S-3 (Reg. No. 333-10919) filed with the Commission
on September 23, 1996).
10.2 Form of Security Agreement dated as of September 6, 1996 made by The Titan
Corporation in favor of The Sumitomo Bank of California (incorporated by
reference to Exhibit 10.2 to Registrant's registration statement on Form S-3
(Reg. No. 333-10919) filed with the Commission on September 23, 1996).
10.3 Form of Pledge Agreement executed as of September 6, 1996 by The Titan Corporation
in favor of The Sumitomo Bank of California (incorporated by reference to Exhibit
10.3 to Registrant's registration statement on Form S-3 (Reg. No. 333-10919)
filed with the Commission on September 23, 1996).
10.4 Form of Patent Collateral Assignment made and entered into as of September 6, 1996
by The Titan Corporation in favor of The Sumitomo Bank of California
(incorporated by reference to Exhibit 10.4 to Registrant's registration statement
on Form S-3 (Reg. No. 333-10919) filed with the Commission on September 23,
1996).
10.5 Form of Security Agreement dated as of September 6, 1996 made by Titan Information
Systems Corporation in favor of The Sumitomo Bank of California (incorporated by
reference to Exhibit 10.5 to Registrant's registration statement on Form S-3
(Reg. No. 333-10919) filed with the Commission on September 23, 1996).
10.6 Form of Patent Collateral Assignment made and entered into as of September 6, 1996
by Titan Information Systems Corporation in favor of The Sumitomo Bank of
California (incorporated by reference to Exhibit 10.6 to Registrant's
registration statement on Form S-3 (Reg. No. 333-10919) filed with the Commission
on September 23, 1996).
10.7 Form of Continuing Guaranty executed as of September 6, 1996 by Titan Information
Systems Corporation in favor of The Sumitomo Bank of California (incorporated by
reference to Exhibit 10.7 to Registrant's registration statement on Form S-3
(Reg. No. 333-10919) filed with the Commission on September 23, 1996).
10.8 Lease Agreement dated as of July 9, 1991 by and between Torrey Pines Limited
Partnership, a California limited partnership, as landlord, and The Titan
Corporation, as tenant (incorporated by reference to Exhibit 10.1 to Registrant's
Form 8-K dated July 11, 1991), as amended by First Amendment to Lease Agreement
dated as of September 30, 1996.
12.1 Calculation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Latham & Watkins (included in Exhibit 5.1 hereto).
24.1 Power of Attorney.
25.1 Statement of Eligibility of Trustee.
</TABLE>
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of the registration statement
in reliance upon Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
of 1933 shall be deemed to be part of the registration statement as of the time
it was declared effective; (2) for the purposes of determining any liability
under the Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; and (3) for
purposes of determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on the 25th day
of October, 1996.
THE TITAN CORPORATION
By: /s/ GENE W. RAY
------------------------------------------
Gene W. Ray
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------------------- -------------------
<C> <S> <C>
/s/ J.S. WEBB*
----------------------------------- Chairman of the Board of Directors October 25, 1996
J.S. Webb
/s/ GENE W. RAY President and Chief Executive Officer
----------------------------------- (Principal Executive Officer) and Director October 25, 1996
Gene W. Ray
/s/ BERNARD M. HIRL Senior Vice President and Chief Financial
----------------------------------- Officer (Principal Financial and Accounting October 25, 1996
Bernard M. Hirl Officer)
/s/ CHARLES R. ALLEN*
----------------------------------- Director October 25, 1996
Charles R. Allen
----------------------------------- Director October 25, 1996
Joseph F. Caligiuri
/s/ DANIEL J. FINK*
----------------------------------- Director October 25, 1996
Daniel J. Fink
/s/ ROBERT E. LA BLANC*
----------------------------------- Director October 25, 1996
Robert E. La Blanc
/s/ THOMAS G. POWNALL*
----------------------------------- Director October 25, 1996
Thomas G. Pownall
*By: /s/ GENE W. RAY
--------------------------------
Gene W. Ray
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Amendment to Registration
Statement on Form S-3 or are incorporated herein by reference.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement. (1)
4.1 Form of Indenture.
5.1 Opinion of Latham & Watkins. (1)
10.1 Form of Fourth Amendment to the Commercial Loan Agreement entered into as of
September 6, 1996 by and between The Sumitomo Bank of California and The Titan
Corporation (incorporated by reference to Exhibit 10.1 to Registrant's
registration statement on Form S-3 (Reg. No. 333-10919) filed with the Commission
on September 23, 1996).
10.2 Form of Security Agreement dated as of September 6, 1996 made by The Titan
Corporation in favor of The Sumitomo Bank of California (incorporated by
reference to Exhibit 10.2 to Registrant's registration statement on Form S-3
(Reg. No. 333-10919) filed with the Commission on September 23, 1996).
10.3 Form of Pledge Agreement executed as of September 6, 1996 by The Titan Corporation
in favor of The Sumitomo Bank of California (incorporated by reference to Exhibit
10.3 to Registrant's registration statement on Form S-3 (Reg. No. 333-10919)
filed with the Commission on September 23, 1996).
10.4 Form of Patent Collateral Assignment made and entered into as of September 6, 1996
by The Titan Corporation in favor of The Sumitomo Bank of California
(incorporated by reference to Exhibit 10.4 to Registrant's registration statement
on Form S-3 (Reg. No. 333-10919) filed with the Commission on September 23,
1996).
10.5 Form of Security Agreement dated as of September 6, 1996 made by Titan Information
Systems Corporation in favor of The Sumitomo Bank of California (incorporated by
reference to Exhibit 10.5 to Registrant's registration statement on Form S-3
(Reg. No. 333-10919) filed with the Commission on September 23, 1996).
10.6 Form of Patent Collateral Assignment made and entered into as of September 6, 1996
by Titan Information Systems Corporation in favor of The Sumitomo Bank of
California (incorporated by reference to Exhibit 10.6 to Registrant's
registration statement on Form S-3 (Reg. No. 333-10919) filed with the Commission
on September 23, 1996).
10.7 Form of Continuing Guaranty executed as of September 6, 1996 by Titan Information
Systems Corporation in favor of The Sumitomo Bank of California (incorporated by
reference to Exhibit 10.7 to Registrant's registration statement on Form S-3
(Reg. No. 333-10919) filed with the Commission on September 23, 1996).
10.8 Lease Agreement dated as of July 9, 1991 by and between Torrey Pines Limited
Partnership, a California limited partnership, as landlord, and The Titan
Corporation, as tenant (incorporated by reference to Exhibit 10.1 to Registrant's
Form 8-K dated July 11, 1991), as amended by First Amendment to Lease Agreement
dated as of September 30, 1996 (1).
12.1 Calculation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Arthur Andersen LLP. (1)
23.2 Consent of Latham & Watkins (included in Exhibit 5.1 hereto).
24.1 Power of Attorney (included on page II-4 hereof).
25.1 Statement of Eligibility of Trustee.
</TABLE>
- -------------------
(1) Filed herewith.
<PAGE>
THE TITAN CORPORATION
____% Convertible Subordinated Debentures Due 2003
UNDERWRITING AGREEMENT
____________, 1996
<PAGE>
UNDERWRITING AGREEMENT
October __, 1996
Dillon, Read & Co. Inc.
535 Madison Avenue
New York, New York 10022
as sole Underwriter
Dear Sirs:
The Titan Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell to you as the sole underwriter (the "Underwriter")
$30,000,000 aggregate principal amount of its ____% Convertible Subordinated
Debentures due 2003 (the "Firm Securities"). In addition, solely for the
purpose of covering overallotments, the Company proposes to issue and sell, at
the Underwriter's option, up to $4,500,000 aggregate principal amount of ____%
Convertible Subordinated Debentures due 2003 (the "Additional Securities"). The
Additional Securities and the Firm Securities are collectively referred to as
the "Securities". The Securities are to be issued pursuant to an indenture (the
"Indenture") to be dated as of October __, 1996 between the Company and Norwest
Bank Minnesota, National Association, as trustee. The Securities are
convertible into shares of Common Stock, par value $.01 per share (the "Common
Stock"), of the Company upon the terms and subject to the conditions set forth
in the Indenture. The shares of Common Stock issuable upon conversion of the
Securities are referred to as the "Shares". The Securities and the Shares are
described in the Prospectus which is referred to below.
The Company has filed, in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively, the "Act"), with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3, including a prospectus,
relating to the Securities and the Shares, which incorporates by reference
documents that the Company has filed in accordance with the provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (collectively, the "Exchange Act"). The Company has furnished to
you, for use by the Underwriter and by dealers, copies of one or more
preliminary prospectuses and all documents incorporated by reference therein
(collectively, the "Preliminary
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Prospectus") relating to the Securities and the Shares. Except where the
context otherwise requires, the registration statement as in effect at the time
of execution of this Agreement or, if the registration statement is not yet
effective, as amended when it becomes effective, including all documents filed
as a part thereof or incorporated by reference therein, and including any
registration statement filed pursuant to Rule 462(b) under the Act increasing
the size of the offering registered under the Act and any information contained
in a prospectus subsequently filed with the Commission pursuant to Rule 424(b)
under the Act and deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Act, is herein called the
"Registration Statement", and the prospectus, including all documents
incorporated therein by reference, in the form filed by the Company with the
Commission pursuant to Rule 424(b) under the Act or, if no such filing is
required, in the form of final prospectus included in the Registration Statement
at the time it became effective, is herein called the "Prospectus".
The Company and the Underwriter agree as follows:
1. SALE AND PURCHASE. On the basis of the representations and
warranties and the other terms and conditions herein set forth, the Company
agrees to sell to the Underwriter and the Underwriter agrees to purchase from
the Company, the entire principal amount of Firm Securities being sold pursuant
to this Agreement, at a purchase price of ____% of the principal amount thereof.
You may release the Firm Securities for public sale promptly after this
Agreement becomes effective. You may from time to time increase or decrease the
public offering price after the initial public offering to such extent as you
may determine.
In addition, on the basis of the representations and warranties and
the other terms and conditions herein set forth, the Company hereby grants to
the Underwriter an option to purchase, and the Underwriter shall have the right
to purchase from the Company, all or a portion of the Additional Securities as
may be necessary to cover overallotments made in connection with the offering of
the Firm Securities, at the same purchase price per Additional Security to be
paid by the Underwriter to the Company for the Firm Securities. This option may
be exercised in whole or in part from time to time on or before the thirtieth
day following the date hereof, by written notice to the Company. Any such
notice shall set forth the aggregate principal amount of Additional Securities
as to which the option is being exercised, and the date and time when the
Additional Securities are to be delivered (any such date and time being
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herein referred to as an "additional time of purchase"); PROVIDED, HOWEVER, that
no additional time of purchase shall occur earlier than the time of purchase (as
defined below) nor earlier than the third business day* after the date on which
the option shall have been exercised nor later than the eighth business day
after the date on which the option shall have been exercised.
2. PAYMENT AND DELIVERY. Payment of the purchase price for the Firm
Securities shall be made to the Company by certified or official bank check, in
immediately available funds, at the office of Dillon, Read & Co. Inc. in New
York City, against delivery of the certificates for the Firm Securities to you.
Such payment and delivery shall be made at 9:30 A.M., New York City time, on
____________, 1996 (unless another time shall be agreed to by you and the
Company or unless postponed in accordance with the provisions of Section 7).
The time at which such payment and delivery are actually made is called the
"time of purchase". Certificates for the Firm Securities shall be delivered to
you through the facilities of the Depository Trust Company ("DTC") in such names
and in such denominations as you shall specify at least two full business days
preceding the time of purchase. A list of such certificates as registered with
DTC shall be made available to you at least one full business day preceding the
time of purchase.
Payment of the purchase price for the Additional Securities shall be
made at the additional time of purchase in the same manner and at the same
office as the payment for the Firm Securities. Certificates for the Additional
Securities shall be delivered to you through the facilities of the DTC in such
names and in such denominations as you shall specify at least two full business
days preceding the additional time of purchase. A list of such certificates as
registered with DTC shall be made available to you for such purpose at least one
full business day preceding the additional time of purchase.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Underwriter that:
(a) Each Preliminary Prospectus filed as part of the Registration
Statement as originally filed or as
- ---------------
* As used herein, "business day" shall mean a day on which the New York Stock
Exchange is open for trading.
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part of any amendment thereto, or filed pursuant to Rule 424 under the Act,
complied when so filed in all material respects with the Act; when the
Registration Statement becomes or became effective and at all times
subsequent thereto up to the time of purchase and the additional time of
purchase, the Registration Statement and the Prospectus, and any
supplements or amendments thereto, complied and will comply in all material
respects with the provisions of the Act and the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"); and the Registration
Statement at all such times did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and the Prospectus at all such times did not and will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that the Company makes no representation or
warranty with respect to any statement contained in the Registration
Statement or the Prospectus in reliance upon and in conformity with
information concerning the Underwriter and furnished in writing by or on
behalf of the Underwriter to the Company expressly for use in the
Registration Statement or the Prospectus and set forth in the section of
the Registration Statement and the Prospectus entitled "Underwriting"; the
documents incorporated by reference in the Prospectus, at the time they
were filed with the Commission, complied in all material respects with the
requirements of the Exchange Act, and do not contain an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except for untrue
statements or omissions that have been expressly superseded and corrected
by the Prospectus or subsequent Exchange Act reports incorporated by
reference into the Prospectus.
(b) As of June 30 1996, the Company had an authorized capitalization
as set forth under the column entitled "Historical June 30, 1996" in the
section of the Registration Statement and the Prospectus entitled
"Capitalization" and, following the purchase of the Firm Securities, the
capitalization of the Company as of June 30, 1996 (as adjusted to reflect
the purchase of the Firm Securities and the application of the estimated
net proceeds therefrom) will be as set forth under the column entitled "As
Adjusted June 30, 1996"
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in the section of the Registration Statement and the Prospectus entitled
"Capitalization"; all of the issued and outstanding shares of capital stock
of the Company have been duly authorized and validly issued and are fully
paid and nonassessable and are free of statutory and contractual preemptive
rights.
(c) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware with
full corporate power and authority to (i) own its properties and conduct
its business as described in the Registration Statement and the Prospectus
and (ii) execute and deliver this Agreement and the Indenture and to issue,
sell and deliver the Securities as herein contemplated and, upon conversion
of the Securities, to issue and deliver the Shares.
(d) Except for 18% of the outstanding shares of capital stock of
Tomotherapeutics, Inc., all of the issued and outstanding shares of capital
stock of each of the subsidiaries of the Company (the "Subsidiaries") are
owned directly by the Company; all of such shares have been duly authorized
and validly issued and are fully paid and nonassessable and, except as
described in the Prospectus, are owned free and clear of any pledge, lien,
encumbrance, security interest or other claim; except as set forth on
Schedule 3(d) hereto, there are no outstanding rights, subscriptions,
warrants, calls, preemptive rights, options or other agreements of any kind
with respect to the capital stock of any of the Subsidiaries.
(e) Each of the Subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation, with full corporate power and
authority to own its respective properties and to conduct its respective
businesses.
(f) Each of the Company and each of the Subsidiaries is duly
qualified or licensed by and is in good standing in each jurisdiction in
which it owns or leases property or conducts its business other than those
jurisdictions in which the failure, individually or in the aggregate, to be
so qualified or licensed could have a material adverse effect on the
properties, assets, operations, business, business prospects or condition
(financial or other) of the Company and the Subsidiaries taken as a whole;
each of the Company and each of the Subsidiaries is in compliance in all
material respects with the laws, orders, rules,
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regulations and directives issued or administered by each such
jurisdiction.
(g) Neither the Company nor any of the Subsidiaries is in breach of,
or in default under (nor has any event occurred which with notice, lapse of
time or both would constitute a breach of, or default under), its charter
or bylaws, or in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture, lease,
mortgage, deed of trust, bank loan or credit agreement, material supply
agreement, material license or other agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which any of them may
be bound or affected. The execution, delivery and performance of this
Agreement and the Indenture, the issuance and sale of the Securities, the
application of the net proceeds thereof as described in the Prospectus, the
issuance of the Shares upon conversion of the Securities and the
consummation of the transactions contemplated hereby and thereby will not
conflict with, or result in any breach of or constitute a default under
(nor constitute any event which with notice, lapse of time or both would
constitute a breach of, or default under), the charter or bylaws of the
Company or any of the Subsidiaries or under any provision of any indenture,
lease, mortgage, deed of trust, bank loan or credit agreement, material
supply agreement, material license or other agreement or instrument to
which the Company or any of the Subsidiaries is a party or by which any of
them or their properties may be bound or affected, or under any federal,
state, local or foreign law, regulation or rule or any decree, judgment or
order applicable to the Company or any of the Subsidiaries.
(h) The Securities have been duly authorized by the Company and, when
executed and authenticated in accordance with the terms of the Indenture
and delivered to and paid for by the Underwriter as contemplated hereby,
will constitute legal, valid and binding obligations of the Company
enforceable in accordance with their terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally and general principles of equity. The Shares have been duly
authorized and validly reserved for issuance upon conversion of the
Securities, are sufficient in number to meet the requirements set forth in
the Indenture for conversion of the Securities at the date of issuance of
the Securities and, when issued and delivered upon such
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conversion, will be fully paid and nonassessable, free and clear of any
pledge, lien, encumbrance, security interest, preemptive right or other
claim.
(i) This Agreement has been duly authorized, executed and delivered
by the Company. The Indenture has been duly authorized by the Company and,
when executed and delivered by the Company, will be a legal, valid and
binding agreement of the Company enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally and general principles of equity.
(j) The Securities and the Indenture conform in all material respects
to the description thereof contained in the Registration Statement and
Prospectus; and the certificates for the Securities are in due and proper
form in accordance with the terms of the Indenture.
(k) The capital stock of the Company, including the Shares, conforms
in all material respects to the description thereof contained in the
Registration Statement and the Prospectus; and the certificates for the
Shares, when issued upon conversion of the Securities, will be in due and
proper form and the holders of the Shares will not be subject to personal
liability by reason of being such holders.
(l) No approval, authorization, consent or order of or filing with
any federal, state, local or foreign governmental or regulatory commission,
board, body, authority or agency is required in connection with the
issuance and sale of the Securities as contemplated hereby or in connection
with the issuance of the Shares upon conversion of the Securities, other
than registration of the Securities and the Shares under the Act, clearance
of the offering of the Securities with the National Association of
Securities Dealers, Inc. (the "NASD"), qualification of the Indenture under
the Trust Indenture Act, approval of the Securities and the Shares for
listing by the New York Stock Exchange and any necessary qualification
under the securities or blue sky laws of the various jurisdictions in which
the Securities are being offered by the Underwriter.
(m) No person has the right, contractual or otherwise, to cause the
Company to issue to it, or register pursuant to the Act, any securities of
the Company in consequence of the issue and sale of the
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Securities to the Underwriter hereunder or the issuance of the Shares upon
conversion of the Securities.
(n) Arthur Andersen LLP, whose reports on the consolidated financial
statements of the Company and the Subsidiaries are included or incorporated
by reference in the Registration Statement and the Prospectus, are
independent public accountants with respect to the Company as required by
the Act and the applicable published rules and regulations thereunder.
(o) All legal or governmental proceedings, contracts or documents of
a character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement have
been so described or filed as required.
(p) Except as disclosed or incorporated by reference in the
Registration Statement or the Prospectus, there is no action, suit or
proceeding pending or threatened against the Company or any of the
Subsidiaries or any of their properties, at law or in equity, or before or
by any federal, state, local or foreign governmental or regulatory
commission, board, body, authority or agency that could reasonably be
expected to result in a judgment, decree or order having a material adverse
effect on the properties, assets, operations, business, business prospects
or condition (financial or other) of the Company and the Subsidiaries taken
as a whole.
(q) The audited and unaudited financial statements included in the
Registration Statement and the Prospectus present fairly the consolidated
financial condition of the Company and the Subsidiaries as of the dates
indicated and the consolidated results of operations and cash flows of the
Company and the Subsidiaries for the periods specified; such financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis during the periods
involved.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as may
be otherwise stated in the Registration Statement or the Prospectus, there
has not been: (A) any material adverse change in the properties, assets,
operations, business, business prospects or condition (financial or other),
present or prospective, of the Company and the Subsidiaries taken as a
whole; (B) any transaction,
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that is material to the Company and the Subsidiaries taken as a whole,
contemplated or entered into by the Company or any of the Subsidiaries; or
(C) any obligation, contingent or otherwise, directly or indirectly
incurred by the Company or any of the Subsidiaries that is material to the
Company and the Subsidiaries taken as a whole.
(s) The Company has obtained the agreement of the officers and
directors listed on Schedule A not to sell, contract to sell, grant any
option to sell, transfer or otherwise dispose of, directly or indirectly,
any shares of Common Stock, or securities convertible into or exchangeable
for Common Stock or warrants or other rights to purchase Common Stock, for
a period of 180 days from the date of the Prospectus without the prior
written consent of Dillon, Read & Co. Inc. In addition, pursuant to the
terms of a registration rights agreement the former shareholders of Eldyne
and Unidyne whose shares have been registered pursuant to the shelf
registration statement described in the Registration Statement, have agreed
not to sell, contract to sell, grant an option to sell, transfer or
otherwise dispose of, directly or indirectly, any shares of Common Stock,
or securities convertible into or exchangeable for Common Stock or warrants
or other rights to purchase Common Stock for a period of 90 days from the
date of the Prospectus.
(t) Neither the Company nor any of the Subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), nor any federal or state law relating to discrimination in the
hiring, promotion or pay of employees nor any applicable federal or state
wages and hours laws, nor any provisions of the Employee Retirement Income
Security Act or the rules and regulations promulgated thereunder, which in
each case might result in any material adverse effect on the properties,
assets, operations, business, business prospects or condition (financial or
other) of the Company and the Subsidiaries taken as a whole.
(u) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), including without limitation under any applicable
Environmental Laws, as are necessary to own, lease and operate its
respective properties and to conduct its
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business, except where the failure to obtain such permits, licenses,
franchises or authorizations would not result in any material adverse
effect on the properties, assets, operations, business, business prospects
or condition (financial or otherwise) of the Company and the Subsidiaries
taken as a whole; the Company and each of the Subsidiaries has fulfilled
and performed all of its material obligations with respect to such permits
and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other
material impairment of the rights of the holder of any such permit; and,
except as described in the Prospectus, such permits contain no restrictions
that are materially burdensome to the Company or any of the Subsidiaries.
(v) The Company has reasonably concluded that the costs and
liabilities singly or in the aggregate (including without limitation any
capital or operating expenditure required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties) would not have a material adverse effect on
the properties, assets, operations, business, business prospects or
condition (financial or other) of the Company and the Subsidiaries taken as
a whole.
(w) Neither the Company nor any of the Subsidiaries, nor any employee
of the Company or any of the Subsidiaries, has made any payment of funds of
the Company or any of the Subsidiaries prohibited by law, and no funds of
the Company or any of the Subsidiaries have been set aside to be used for
any payment prohibited by law.
(x) The Company and the Subsidiaries have filed all federal or state
income or franchise tax returns required to be filed and have paid all
taxes shown thereon as due, and there is no material tax deficiency which
has been or might be asserted against the Company or any of the
Subsidiaries; all material tax liabilities are adequately provided for on
the books of the Company and the Subsidiaries.
(y) The Company has not incurred any liability for any finder's fees
or similar payments in connection with the transactions herein
contemplated.
(z) The Company and the Subsidiaries have good title to all
properties and assets owned or leased by
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them, in each case free and clear of all liens, security interests,
pledges, charges, encumbrances, mortgages and defects (except such as are
described or referred to in the Prospectus or the financial statements and
the notes thereto contained therein or such as do not interfere with the
use made and proposed to be made of such property by the Company and the
Subsidiaries).
(aa) Neither the Company nor any of the Subsidiaries is an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended, or is subject to regulation under such Act.
4. CERTAIN COVENANTS OF THE COMPANY. The Company hereby agrees:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the offering and sale of the Securities and, upon
conversion, the issuance of the Shares under the securities or blue sky
laws of such states as you may designate and to maintain such
qualifications in effect as long as required for the distribution of the
Securities and the Shares, provided that the Company shall not be required
to qualify as a foreign corporation or to consent to the service of process
under the laws of any such state (except service of process with respect to
the offering and sale of the Securities and the Shares); promptly to advise
you of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities or the Shares for sale in
any jurisdiction or the initiation or threatening of any proceeding for
such purpose; and to use its best efforts to obtain the withdrawal of any
order of suspension at the earliest practicable moment;
(b) to make available to you in New York City, as soon as practicable
after the Registration Statement becomes effective, and thereafter from
time to time to furnish to you, as many copies of the Prospectus (or of the
Prospectus as amended or supplemented if the Company shall have made any
amendment or supplement thereto after the effective date of the
Registration Statement) as you may request for the purposes contemplated by
the Act;
(c) to advise you promptly and if requested by you to confirm such
advice in writing (i) when the Registration Statement has become effective
and when any post-effective amendment thereto becomes effective
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and (ii) when the Prospectus is filed with the Commission pursuant to Rule
424(b) under the Act, if required under the Act (which the Company agrees
to file in a timely manner under such Rule);
(d) to advise you promptly, confirming such advice in writing, of any
request by the Commission for amendments or supplements to the Registration
Statement or the Prospectus or for additional information with respect
thereto, or of notice of institution of proceedings for or the entry of a
stop order suspending the effectiveness of the Registration Statement and,
if the Commission should enter a stop order suspending the effectiveness of
the Registration Statement, to use its best efforts to obtain the lifting
or removal of such order as soon as possible; to advise you promptly of any
proposal to amend or supplement the Registration Statement or the
Prospectus, including by filing any document that would be incorporated
therein by reference and to file no such amendment or supplement to which
you shall object in writing;
(e) to furnish to you for a period of five years from the date of
this Agreement (i) copies of all reports or other communications that the
Company shall send to its shareholders or from time to time shall publish
or publicly disseminate and (ii) copies of all annual, quarterly and
current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or
such other similar form as may be designated by the Commission, and any
other document filed by the Company pursuant to Section 12, 13, 14 or 15(d)
of the Exchange Act;
(f) to advise you promptly of the happening of any event known to the
Company within the time during which a prospectus relating to the
Securities and the Shares is required to be delivered under the Act that,
in the reasonable judgment of the Company, would require the making of any
change in the Prospectus then being used, or in the information
incorporated therein by reference, so that the Prospectus, as then
supplemented, would not include an untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they are made, not misleading
and, during such time, promptly to prepare and furnish, at the Company's
expense, to you such amendments or supplements to such Prospectus as may be
necessary to reflect any such change in such quantities as requested by
you, and to furnish to you a copy of such proposed amendment or supplement
before filing any such amendment or supplement with the Commission;
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(g) to make generally available to its security holders, including
holders of the Securities, and to deliver to you, an earnings statement of
the Company (which need not be audited and which will satisfy the
provisions of Section 11(a) of the Act including, at the option of the
Company, Rule 158) covering a period of 12 months beginning after the
effective date of the Registration Statement but ending not later than 15
months after the date of the Registration Statement, as soon as is
reasonably practicable after the termination of such 12-month period;
(h) to furnish to you two signed copies of the Registration
Statement, as initially filed with the Commission, and of all amendments
thereto (including all exhibits thereto and documents incorporated by
reference therein);
(i) to furnish to you as early as practicable prior to the time of
purchase and the additional time of purchase, as the case may be, but not
later than two business days prior thereto, a copy of the latest available
unaudited interim consolidated financial statements, if any, of the Company
and the Subsidiaries that have been read by the Company's independent
certified public accountants as stated in their letter to be furnished
pursuant to Section 6(c);
(j) to apply the net proceeds from the sale of the Securities in the
manner set forth under the caption "Use of Proceeds" in the Registration
Statement and the Prospectus;
(k) whether or not the transactions contemplated in this Agreement
are consummated or this Agreement otherwise becomes effective or is
terminated, to pay all expenses, fees and taxes (other than (x) any
transfer taxes and (y) fees and disbursements of your counsel except as set
forth in Section 5 and clauses (iii) and (iv) below) in connection with
(i) the preparation and filing of the Registration Statement, each
Preliminary Prospectus, the Prospectus and any amendment or supplement
thereto, and the printing and furnishing of copies of each thereof to you
and to dealers (including costs of mailing and shipment), (ii) the
issuance, sale and delivery of the Securities and the issuance and delivery
of the Shares upon conversion of the Securities, (iii) the word processing
or printing of the Indenture, this Agreement and any dealer agreements, and
the reproduction or printing and furnishing of copies of each thereof to
you and to dealers (including costs of mailing and
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shipment), (iv) the qualification of the Securities and the Shares for
offering and sale under state laws as aforesaid and the determination of
the eligibility of the Securities for investment under state law (including
legal fees and filing fees and other disbursements of your counsel) and the
printing and furnishing of copies of any blue sky surveys or legal
investment surveys to you and to dealers, (v) any listing of the Securities
and the Shares on any securities exchange or qualification of the
Securities or the Shares for inclusion on the New York Stock Exchange and
any registration thereof under the Exchange Act, (vi) any filing for review
of the public offering of the Securities and the Shares by the NASD, (viii)
any fees payable to investment rating agencies with respect to the
Securities and (ix) the performance of the Company's other obligations
hereunder;
(l) not to sell, contract to sell, grant any option to sell, transfer
or otherwise dispose of, directly or indirectly, any shares of Common Stock
or securities convertible into or exchangeable for Common Stock or warrants
or other rights to purchase Common Stock or permit the registration under
the Act of any shares of Common Stock, except for the registration of the
Securities and the sales to you pursuant to this Agreement and except as
set forth on Schedule 4(1) hereto (and as described (or incorporated by
reference) in the Registration Statement), and except for issuances of
options or shares of Common Stock in accordance with any employee stock
option plans or any other employee benefit plans set forth on Schedule 4(1)
hereto (and described (or incorporated by reference) in the Registration
Statement)currently maintained by the Company, for a period commencing on
the date hereof and continuing for 180 days after the date of the
Prospectus, without the prior written consent of Dillon, Read & Co. Inc.;
(m) to refrain from investing the proceeds from the sale of the
Securities in a manner to cause the Company or any of the Subsidiaries to
become an "investment company" within the meaning of the Investment Company
Act of 1940, as amended; and
(n) at any time that the number of authorized but unissued shares of
Common Stock (or shares of Common Stock held in treasury and available for
such purpose) shall be less than the aggregate number of shares of Common
Stock into which the Securities then outstanding shall be convertible, to
take such action as is necessary to increase the number of shares which the
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Company is authorized to issue so that the Company will have a sufficient
number of shares of Common Stock available for conversion of the Securities
then outstanding.
5. REIMBURSEMENT OF UNDERWRITER'S EXPENSES. If the Firm Securities
or the Additional Securities are not delivered for any reason, other than the
failure of the Underwriter to purchase the Firm Securities or the Additional
Securities as provided herein (unless such failure is permitted under the
provisions of Section 6 or Section 7(b) of this Agreement), the Company will
reimburse the Underwriter for all of its out-of-pocket expenses, including the
fees and disbursements of its counsel.
6. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter hereunder are subject to the accuracy of the representations and
warranties on the part of the Company on the date hereof and at the time of
purchase (and the obligations of the Underwriter at any additional time of
purchase are subject to the accuracy of the representations and warranties on
the part of the Company on the date hereof and at the time of purchase and at
such additional time of purchase, as the case may be), the performance by the
Company of its obligations hereunder and to the following conditions:
(a) The Company shall furnish to you at the time of purchase and at
such additional time of purchase, as the case may be, an opinion of Latham
& Watkins, counsel for the Company, addressed to the Underwriter and dated
the time of purchase or such additional time of purchase, as the case may
be, and in form satisfactory to Gibson, Dunn & Crutcher LLP, counsel for
the Underwriter, stating that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with full corporate power and authority (A) to own its
properties and conduct its business as described in the Registration
Statement and the Prospectus and (B) to execute and deliver this
Agreement and the Indenture and to issue, sell and deliver the
Securities as herein contemplated and, upon conversion of the
Securities, to issue and deliver the Shares;
(ii) each of the Subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the state in which such Subsidiary is incorporated,
15
<PAGE>
with full corporate power and authority to own its properties and to
conduct its business to the extent described in the Registration
Statement and the Prospectus;
(iii) each of the Company and each of the Subsidiaries is duly
qualified or licensed to do business by and is in good standing as a
foreign corporation in the jurisdictions set forth on Schedule
6(a)(iii) hereto;
(iv) Except for 18% of the outstanding shares of capital stock of
Tomotherapeutics, Inc., all of the issued and outstanding shares of
capital stock of each Subsidiary have been duly authorized and validly
issued and are fully paid and nonassessable and, except as set forth
in the Prospectus, are owned, directly or indirectly, by the Company
free and clear of any pledge, lien, encumbrance, security interest,
preemptive right or other claim, and except as set forth on Schedule
3(d) hereto, there are no rights, warrants, options or other
agreements to acquire or instruments convertible into or exchangeable
for any shares of capital stock or other equity interest of any
Subsidiary, except as set forth in the Prospectus;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the Indenture has been duly authorized, executed and
delivered by the Company and (assuming due authorization, execution
and delivery by the trustee thereunder) is the legally valid and
binding agreement of the Company enforceable in accordance with its
terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally and general
principles of equity;
(vii) (a) the Securities have been duly authorized, executed and
delivered by the Company, and, when executed and authenticated in
accordance with the terms of the Indenture and delivered to and paid
for by the Underwriter as contemplated hereby, will constitute legally
valid and binding obligations of the Company enforceable in accordance
with their terms, except as the enforceability thereof may be limited
by
16
<PAGE>
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally and general
principles of equity; (b) the global certificate for the Securities
issued to the DTC is in due and proper form in accordance with the
terms of the Indenture; and (c) the Securities are convertible into
Common Stock of the Company in accordance with the terms of the
Indenture;
(viii) the Shares have been duly authorized and validly reserved
for issuance upon conversion of the Securities, are sufficient in
number to meet the requirements set forth in the Indenture for
conversion of the Securities at the date of issuance of the Securities
and, when issued and delivered upon such conversion, will be fully
paid and nonassessable and, assuming the holders of the Securities
have no notice of any adverse claim with respect to the Shares, such
holders will acquire the Shares free of adverse claims;
(ix) the Company has authorized capital stock as set forth under
the heading "Capitalization" in the Registration Statement and the
Prospectus and (b) the outstanding shares of capital stock of the
Company have been duly authorized and validly issued, and, based on
our knowledge of the facts set forth in an officer's certificate, are
fully paid, nonassessable and free of statutory and contractual
preemptive rights;
(x) (a) the Securities and the Indenture conform in all material
respects to the description thereof contained in the Registration
Statement and Prospectus; and (b) the capital stock of the Company,
including the Shares, conforms in all material respects to the
description thereof contained in the Registration Statement and the
Prospectus;
(xi) the Registration Statement and the Prospectus (except as to
the financial statements and schedules contained or incorporated by
reference therein and the Trustee's Statement of Eligibility and
Qualification on Form T-1 as to which such counsel need express no
opinion)
17
<PAGE>
comply as to form in all material respects with the requirements for
registration statements on Form S-3 under the Act and the Trust
Indenture Act; provided, however, that such counsel need express no
opinion pursuant to this paragraph as to the accuracy, completeness or
fairness of the statements made in the Registration Statement or
Prospectus;
(xii) the Registration Statement has become effective under the
Act and, to the best of such counsel's knowledge, no stop order
proceedings with respect thereto are pending or threatened under the
Act;
(xiii) the Indenture has been qualified under the Trust Indenture
Act;
(xiv) no approval, authorization, consent or order of or filing
with any governmental or regulatory commission, board, body, authority
or agency is required in connection with the issuance or sale of the
Securities as contemplated hereby or in connection with the issuance
of the Shares upon conversion of the Securities, other than
registration of the Securities and the Shares under the Act and
qualification of the Indenture under the Trust Indenture Act (except
such counsel need express no opinion as to any necessary qualification
under the state securities or blue sky laws of the various
jurisdictions in which the Securities are being offered by the
Underwriter);
(xv) The execution, delivery and performance of this Agreement
and the Indenture by the Company, the issuance and sale of the
Securities, the application of the net proceeds thereof as described
in the Prospectus, the issuance of the Shares upon conversion of the
Securities and the consummation by the Company of the transactions
contemplated hereby and thereby do not and will not conflict with, or
result in any breach of, or constitute a default under (nor constitute
any event which with notice, lapse of time or both would constitute a
breach of or default under), the charter or bylaws of the Company or
any of the Subsidiaries, or any provision of any agreement for
borrowed money under which the Company is obligated and of which such
counsel has knowledge, or other contract or agreement filed as an
exhibit to the Registration Statement or any exhibit
18
<PAGE>
incorporated by reference therein, or under any law, regulation or
rule applicable to the Company or any of the Subsidiaries, or any
decree, judgment or order applicable to the Company or any of the
Subsidiaries and of which such counsel has knowledge;
(xvi) all contracts or documents of which such counsel has
knowledge and which are of a
19
<PAGE>
character required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration
Statement have been so described or filed;
(xvii) the documents incorporated by reference in the Registration
Statement and Prospectus, when they were filed (or, if an amendment
with respect to any such document was filed, when such amendment was
filed), comply as to form in all material respects with the Exchange
Act (except as to the financial statements and schedules and other
financial and statistical data contained or incorporated by reference
therein, as to which such counsel need express no opinion); provided,
however, that such counsel need express no opinion pursuant to this
paragraph as to the accuracy, completeness or fairness of the
statements made in the documents incorporated by reference in the
Registration Statement or Prospectus;
(xviii) to the best of such counsel's knowledge, no person has the
right, contractual or otherwise, to cause the Company to issue to it,
or register pursuant to the Act, any securities of the Company in
consequence of the issue and sale of the Securities to the Underwriter
hereunder or the issuance of the Shares upon conversion of the
Securities;
(xix) the statements in the Registration Statement and the
Prospectus under the captions "Description of Debentures" and
"Description of Capital Stock", insofar as such statements constitute
a summary of legal matters, are accurate in all material respects; and
20
<PAGE>
(xx) neither the Company nor any of the Subsidiaries is an
"investment company" or a person "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the independent
public accountants for the Company, and the Underwriter's
representatives, at which the contents of the Registration Statement
and the Prospectus and related matters were discussed and, although
such counsel is not passing upon, and does not assume any
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus,
during the course of such participation, no facts came to such
counsel's attention that caused them to believe that the Registration
Statement, at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus (including the
documents incorporated by reference therein), as of the date hereof,
contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; it being
understood that such counsel need express no belief with respect to
the financial statements and schedules and other financial and
statistical data included in the Registration Statement or the
Prospectus or incorporated by reference therein or with respect to the
Form T-1.
(b) The Company shall furnish to you at the time of purchase and at
such additional time of purchase, as the case may be, an opinion of
____________, [Title] of the Company, addressed to the Underwriter and
dated the time of purchase or such additional time of purchase, as the case
may be, and in form satisfactory to Gibson, Dunn & Crutcher LLP, counsel
for the Underwriter, stating that:
(i) to the best of such counsel's knowledge, neither the Company
nor any of the Subsidiaries is in breach of or in default under (nor
has any event occurred which with notice, lapse of time or
21
<PAGE>
both would constitute a breach of or default under) any material
license, indenture, lease, mortgage, deed of trust, bank loan or
credit agreement or any other agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which the Company
or any of the Subsidiaries or their properties are bound or affected
or under any law, regulation or rule or any decree, judgment or order
applicable to the Company or any of the Subsidiaries, except for such
matters as could not reasonably be expected, individually or in the
aggregate, to have a material adverse effect on the properties,
assets, operations, business, business prospects or condition
(financial or other) of the Company and the Subsidiaries taken as a
whole; and
(ii) to the best of such counsel's knowledge, the Company and
each of the Subsidiaries has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits"),
including without limitation under any applicable Environmental Laws,
as are necessary to own, lease and operate its respective properties
and to conduct its business in the manner described in the Prospectus;
to the best of such counsel's knowledge, after due inquiry, the
Company and each of the Subsidiaries has fulfilled and performed all
of its material obligations with respect to such permits and no event
has occurred which allows, or after notice or lapse of time would
allow, revocation or termination thereof or results in any other
material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, such permits
contain no restrictions that, to the knowledge of such counsel, are
materially burdensome to the Company or any of the Subsidiaries;
(iii) except as described in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings, to the best of
such counsel's knowledge, pending or threatened against the Company or
any of the Subsidiaries, or any of their respective properties, at law
or in equity, or before or by any federal, state, local or foreign
governmental or regulatory commission, board, body, authority or
agency that individually or in the aggregate could reasonably be
expected to result in a judgment, decree or order having a
22
<PAGE>
material adverse effect on the properties, assets, operations,
business, business prospects or condition (financial or other) of the
Company and the Subsidiaries taken as a whole.
(c) You shall have received from Arthur Andersen LLP customary
letters dated, respectively, the date of this Agreement and the time of
purchase and additional time of purchase, as the case may be, with respect
to the financial statements and certain financial information contained in
or incorporated by reference in the Registration Statement and the
Prospectus and addressed to the you in form and substance satisfactory to
you.
(d) You shall have received at the time of purchase and at the
additional time of purchase, as the case may be, opinions from Gibson, Dunn
& Crutcher LLP in form and substance satisfactory to you.
(e) No amendment or supplement to the Registration Statement or the
Prospectus, including documents deemed to be incorporated by reference
therein, shall be filed prior to the time the Registration Statement
becomes effective to which you shall have objected in writing.
(f) The Registration Statement shall become effective at or before
5:00 P.M., New York City time, on the date of this Agreement and, if
Rule 430A under the Act is used, the Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) under the Act at or before
5:00 P.M., New York City time, on the second full business day after the
date of this Agreement; PROVIDED, HOWEVER, that the Company and you from
time to time may agree in writing or by telephone, confirmed in writing, on
a later date.
(g) Prior to the time of purchase or the additional time of purchase,
as the case may be: (i) no stop order with respect to the effectiveness of
the Registration Statement shall have been issued under the Act or
proceedings initiated under Section 8(d) or 8(e) of the Act; (ii) the
Registration Statement and all amendments thereto, or modifications
thereof, if any, shall not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and (iii) the
Prospectus and all amendments or supplements thereto, or modifications
thereof, if any, shall not contain an untrue statement of a material
fact or omit to state a
23
<PAGE>
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(h) Between the time of execution of this Agreement and the time of
purchase or the additional time of purchase, as the case may be, there has
not been: (i) any material and adverse change, present or prospective, in
the properties, assets, operations, business, business prospects or
condition (financial or other) of the Company and the Subsidiaries taken as
a whole, other than as described in the Registration Statement and the
Prospectus; (ii) any transaction that is material to the Company and the
Subsidiaries taken as a whole contemplated or entered into by the Company
or any of the Subsidiaries, other than as described in the Registration
Statement and the Prospectus; or (iii) any obligation, contingent or
otherwise, directly or indirectly, incurred by the Company or any of the
Subsidiaries that is material to the Company and the Subsidiaries taken as
a whole, other than as described in the Registration Statement and the
Prospectus.
(i) The Company, at the time of purchase or additional time of
purchase, as the case may be, will deliver to you a certificate of two of
its executive officers to the effect that the representations and
warranties of the Company as set forth in this Agreement are true and
correct as of each such date and the conditions set forth in Section 6(g)
and Section 6(h) have been met.
(j) You shall have received a signed letter, dated the date of this
Agreement, from each of the officers and directors listed in Schedule A to
the effect that such persons shall not sell, contract to sell, grant any
option to sell, transfer or otherwise dispose of, directly or indirectly,
any shares of Common Stock or securities convertible into or exchangeable
for Common Stock or warrants or other rights to purchase Common Stock for a
period of 180 days from the date of the Prospectus without the prior
written consent of Dillon, Read & Co. Inc.
(k) The Company shall have furnished to you such other documents and
certificates as to the accuracy and completeness of any statement in the
Registration Statement or the Prospectus as of the time of purchase and the
additional time of purchase, as the case may be, as you reasonably may
request.
24
<PAGE>
(l) The Company shall have performed such of its obligations under
this Agreement as are to be performed by the terms hereof at or before the
time of purchase and at or before the additional time of purchase, as the
case may be.
(m) Between the time of execution of this Agreement and the time of
purchase or the additional time of purchase, as the case may be, there
shall not have occurred any downgrading, nor shall any notice have been
given of (i) any intended or potential downgrading or (ii) any review or
possible change that does not indicate an improvement or maintenance in the
rating accorded any rated securities of the Company, including, if rated,
the Securities, by any "nationally recognized statistical rating
organization", as that term is defined in Rule 436(g)(2) under the Act.
7. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective (i) if Rule 430A under the
Act is not used, when you shall have received notification of the
effectiveness of the Registration Statement, or (ii) if Rule 430A under the
Act is used, when the parties hereto have executed and delivered this
Agreement.
(b) The obligations of the Underwriter hereunder shall be subject to
termination in your absolute discretion if, at any time prior to the time
of purchase or, with respect to the purchase of any Additional Securities,
the additional time of purchase, as the case may be, trading in securities
on the New York Stock Exchange shall have been suspended or minimum prices
shall have been established on the New York Stock Exchange or if a banking
moratorium shall have been declared either by the United States or New York
State authorities, or if the United States shall have declared war in
accordance with its constitutional processes or there shall have occurred
any material outbreak or escalation of hostilities or other national or
international calamity or crisis of such magnitude in its effect on, or any
material adverse change in, any financial market which, in each case, in
your judgment, makes it impracticable to market the Securities. If you
elect to terminate this Agreement as provided in this Section 7(b), the
Company shall be notified promptly by letter or telegram.
(c) If the purchase of the Securities by the Underwriter, as
contemplated by this Agreement, is not consummated for any reason permitted
under this
25
<PAGE>
Agreement or if such purchase is not consummated because the Company shall
be unable to comply with any of the terms of this Agreement, the Company
shall not be under any obligation or liability under this Agreement (except
to the extent provided in Sections 4(k), 5 and 8), and the Underwriter
shall be under no obligation or liability to the Company under this
Agreement (except to the extent provided in Section 8).
8. INDEMNITY BY THE COMPANY AND THE UNDERWRITER.
(a) The Company agrees to indemnify, defend and hold harmless the
Underwriter, each person that controls the Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, and the
Underwriter's agents, employees, officers and directors and the agents,
employees, officers and directors of any such controlling person
(collectively, the "Underwriter indemnified parties") from and against any
and all losses, claims, damages, judgments, liabilities and expenses
(including the fees and expenses of counsel and other expenses in
connection with investigating, defending or settling any such action or
claim) which, jointly or severally, any Underwriter indemnified party may
incur as they are incurred (and regardless of whether such Underwriter
indemnified party is a party to the litigation, if any) arising out of or
based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement relating to the Securities or
the Prospectus or any Preliminary Prospectus, or arising out of or based
upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, except insofar as such losses, claims, damages, judgments,
liabilities or expenses arise out of, or are based upon, any such untrue
statement or omission or alleged untrue statement or omission based upon
and in conformity with information with respect to the Underwriter
furnished in writing by the Underwriter to the Company expressly for use
therein with reference to the Underwriter. This indemnity agreement will
be in addition to any liability the Company otherwise may have.
(b) If any action or proceeding (including any governmental or
regulatory investigation or proceeding) shall be brought or asserted
against any Underwriter indemnified party, with respect to which indemnity
may be sought against the Company pursuant to this
26
<PAGE>
Section 8, such Underwriter indemnified party shall promptly notify the
Company in writing, and the Company shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the
Underwriter indemnified party and payment of all fees and expenses;
provided that the omission so to notify the Company shall not relieve it
from any liability that it may have to any Underwriter indemnified party.
An Underwriter indemnified party shall have the right to employ separate
counsel in any such action or proceeding and to assume the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Underwriter indemnified party unless (i) the employment of such counsel has
been authorized in writing by the Company, (ii) the Company has failed
promptly to assume the defense and employ counsel reasonably satisfactory
to the Underwriter indemnified party or (iii) the named parties to any such
action or proceeding (including any impleaded parties) include both the
Underwriter indemnified party and the Company and such Underwriter
indemnified party shall have reasonably concluded that there may be one or
more legal defenses available to it that are different from or additional
to those available to the Company (in which case the Company shall not have
the right to assume the defense of such action on behalf of such
Underwriter indemnified party), in any of which events such fees and
expenses shall be borne by the Company and reimbursed as they are incurred.
It is understood, however, that the Company shall not, in connection with
any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel) at
any time for all such Underwriter indemnified parties, which firm shall be
designated in writing by Dillon, Read & Co. Inc., and that all such fees
and expenses shall be reimbursed as they are incurred. The Company shall
not be liable for any settlement of any such action effected without the
written consent of the Company (which consent shall not be unreasonably
withheld or delayed), but if settled with the written consent of the
Company, or if there is a final judgment with respect thereto, the Company
agrees to indemnify and hold harmless each Underwriter indemnified party
from and against any loss or liability by reason of such settlement or
judgment.
(c) The Underwriter agrees to indemnify and hold harmless the
Company, its directors, its officers who sign the Registration Statement,
and any person that
27
<PAGE>
controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act (collectively, the "Company indemnified
parties") to the same extent as the foregoing indemnity from the Company to
the Underwriter indemnified parties, but only with respect to information
concerning the Underwriter furnished in writing by or on behalf of the
Underwriter to the Company expressly for use with respect to the
Underwriter in the Registration Statement, any Preliminary Prospectus or
the Prospectus. In case any action shall be brought against any Company
indemnified party based on the Registration Statement, any Preliminary
Prospectus or the Prospectus and in respect of which indemnity may be
sought against the Underwriter pursuant to this Section 8(c), the
Underwriter shall have the rights and duties given to the Company by
Section 8(b) (except that if the Company shall have assumed the defense
thereof the Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof, PROVIDED
that the fees and expenses of such separate counsel shall be at the expense
of the Underwriter), and the Company indemnified parties shall have the
rights and duties given to the Underwriter indemnified parties by
Section 8(b).
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless any Underwriter indemnified
party or any Company indemnified party, then the party required to
indemnify such indemnified party under this Section 8, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages, judgments, liabilities and expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriter on the other hand from the offering of the
Securities, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and the Underwriter
on the other hand in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriter on the other
hand shall be deemed to be in the same proportion as the total proceeds
from the
28
<PAGE>
offering (net of underwriting discounts and commissions but before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriter, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
of the Company on the one hand and the Underwriter on the other hand shall
be determined by reference to, among other things, whether the untrue
statement or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied
by the Company or by the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result
of the losses, claims, damages, judgments, liabilities and expenses
referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with investigating
or defending any claim or action.
The Company and the Underwriter agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by
pro rata allocation or by any other method of allocation that does not
take account of the equitable considerations referred to in this
Section 8(d). Notwithstanding the provisions of this Section 8(d), no
Underwriter indemnified party shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by such Underwriter indemnified party and distributed to the
public were offered to the public exceeds the amount of any damages which
such Underwriter indemnified party otherwise has been required to pay by
reason of such untrue statement or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
The statements under the caption "Underwriting" in the Prospectus (to
the extent such statements relate to the Underwriter) constitute the only
information furnished to the Company in writing by the Underwriter
expressly for use in the Registration Statement, any Preliminary Prospectus
or the Prospectus.
(e) The indemnity and contribution agreements contained in this
Section 8 and the representations, warranties and covenants of the Company
contained in
29
<PAGE>
this Agreement shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter indemnified party or
by or on behalf of any Company indemnified party, and shall survive any
termination of this Agreement or the issuance and delivery of the
Securities. Subject to the provisions of Section 8(b) and Section 8(c),
the Company and the Underwriter agree promptly to notify the other of the
commencement of any litigation or proceeding against it in connection with
the issuance and sale of the Securities or in connection with the
Registration Statement or the Prospectus.
9. NOTICES. Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriter, shall be sufficient in all respects if delivered or sent to
Dillon, Read & Co. Inc., 535 Madison Avenue, New York, New York 10022,
Attention: Syndicate Department; and if to the Company, shall be sufficient in
all respects if delivered or sent to the Company at the offices of the Company
at 3033 Science Park Road, San Diego, California 92121, Attention: Corporate
Secretary.
10. CONSTRUCTION. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. THE SECTION HEADINGS IN THIS AGREEMENT HAVE
BEEN INSERTED AS A MATTER OF CONVENIENCE OF REFERENCE AND ARE NOT A PART OF THIS
AGREEMENT.
11. PARTIES AT INTEREST. The Agreement herein set forth has been and
is made solely for the benefit of the Underwriter, the Company, the Underwriter
indemnified parties and the Company indemnified parties, and their respective
successors, assigns, executors and administrators. No other person,
partnership, association or corporation (including a purchaser, as such
purchaser, from the Underwriter) shall acquire or have any right under or by
virtue of this Agreement.
12. COUNTERPARTS. This Agreement may be signed by the parties in
counterparts which together shall constitute one and the same agreement among
the parties.
If the foregoing correctly sets forth the understanding between the
Company and the Underwriter, please so indicate in the space provided below for
such purpose, whereupon this letter and your acceptance shall constitute a
binding agreement between the Company and the Underwriter.
30
<PAGE>
Very truly yours,
THE TITAN CORPORATION
By:
-------------------------
Name:
Title:
Accepted and agreed to as of
the date first above written
DILLON, READ & CO. INC., as
sole Underwriter
By:
---------------------------
Name:
Title:
31
<PAGE>
SCHEDULE A
OFFICERS AND DIRECTORS WHO HAVE EXECUTED LOCK-UP AGREEMENTS
J.S. Webb
Gene W. Ray
Louis L. Fowler
Ronald B. Gorda
Cornelius L. Hensel
Bernard M. Hirl
Frederick L. Judge
Prabhav Maniyar
Charles R. Allen
Joseph F. Caligiuri
Daniel J. Fink
Robert E. La Blanc
Thomas G. Pownall
A-1
<PAGE>
[Letterhead]
October 18, 1996
The Titan Corporation
3033 Science Park Road
San Diego, CA 92121
Re: Registration Statement on Form S-3, File No. 333-10965
$34,500,000 Aggregate Principal Amount of ___% Convertible
Suboridnated Debentures
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Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933,
as amended (the "Act"), by The Titan Corporation, a Delaware corporation (the
"Company"), on Form S-3 filed with the Securities and Exchange Commission (the
"Commission") on August 28, 1996 (File No. 333-10965), as amended by Amendment
No. 1 filed with the Commission on October 11, 1996 (collectively, the
"Registration Statement") of $34,500,000 aggregate principal amount of __%
Convertible Subordinated Debentures due 2003 (the "Securities") and shares of
the Company's common stock, par value $0.01 per share (the "Shares"), into which
the Securities may be converted pursuant to the proposed form of Indenture (the
"Indenture") between the Company and Norwest Bank Minnesota, National
Association, as trustee (the "Trustee") filed as an exhibit to the Registration
Statement, you have requested our opinion with respect to the matters set forth
below.
In our capacity as your counsel in connection with such registration,
we are familiar with the proceedings taken and proposed to be taken by the
Company in connection with the authorization and issuance of the Securities, and
for the purposes of this opinion, have assumed such proceedings will be timely
completed in the manner presently proposed. In addition, we have made such
legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
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October 18, 1996
Page 2
We are opining herein as to the effect on the subject transaction only
of the internal laws of the States of California and New York and the General
Corporation Law of the State of Delaware, and we express no opinion with respect
to the applicability thereto, or the effect thereon, of the laws of any other
jurisdiction or, in the case of Delaware, any other laws, or as to any matters
of municipal law or the laws of any other local agencies within the state.
Capitalized terms used herein without definition have the meanings
ascribed to them in the Registration Statement.
Subject to the foregoing and the other matters set forth herein, it is
our opinion that as of the date hereof:
1. The Securities have been duly authorized by all necessary corporate
action of the Company, and when executed, authenticated and delivered by or on
behalf of the Company against payment therefor in accordance with the terms of
the Indenture, will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms.
2. The Shares issuable upon conversion of the Securities have been duly
authorized and, when issued upon conversion of the Securities in accordance with
the terms of the Indenture, will be validly issued, fully paid and
nonassessable.
The opinions rendered in paragraph 1 relating to the enforceability of
the Securities are subject to the following exceptions, limitations and
qualifications: (i) the effect of bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting the rights and remedies of creditors; (ii) the effect of general
principles of equity, whether enforcement is considered in a proceeding in
equity or at law, and the discretion of the court before which any proceeding
therefor may be brought and (iii) with respect to indemnification of or
contribution to the Trustee by the Company, the unenforceability under certain
circumstances under law or court decisions of provisions providing for the
indemnification of or contribution to a party with respect to a liability
where such indemnification or contribution is contrary to public policy.
To the extent that the obligations of the Company under the Indenture
may be dependent upon such matters, we assume for purposes of this opinion that:
the Trustee is duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization; the Trustee has complied with any
applicable requirement to file returns and pay taxes under the Franchise Tax Law
of the State of California; the Trustee is duly qualified to engage in the
activities contemplated by the Indenture; the Indenture has been duly
authorized, executed and delivered by the Trustee and constitutes the legal,
valid, binding and enforceable obligation of the Trustee, enforceable against
the Trustee in accordance with its terms; the Trustee is in compliance,
generally and with respect to acting as a trustee under the Indenture, with all
applicable laws and regulations; and the Trustee has the requisite power and
authority to perform its obligations under the Indenture.
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October 18, 1996
Page 3
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters."
Very truly yours,
/s/ Latham & Watkins
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FIRST AMENDMENT TO
LEASE AGREEMENT
This First Amendment to Lease Agreement (the "Amendment") is entered
into as of September 30, 1996 by and between The Titan Corporation, a Delaware
corporation, as tenant ("Tenant") and Torrey Pines Limited Partnership, a
California limited partnership, as landlord ("Landlord").
RECITALS
A. Tenant and Landlord entered into that certain Lease Agreement
dated July 9, 1991 (the "Lease").
B. Tenant and Landlord desire to amend the Lease on the terms and
conditions set forth herein. Capitalized terms used herein without definition
have the meanings ascribed to them in the Lease.
AMENDMENT
NOW THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Tenant and Landlord hereby agree as follows:
1. AMENDMENT TO EXHIBIT E. Section (a)(iii) of Exhibit E of the
Lease is hereby amended to read in its entirety as follows:
"(iii) Maintain at all times on a consolidated
basis a ratio of Indebtedness to Consolidated Tangible Net
Worth of not more than 3.32 to 1.00."
2. LETTER OF CREDIT. Within three business days of the closing of
Tenant's pending public offering of Convertible Debt, Tenant shall post an
irrevocable standby letter of credit (the "Letter of Credit") in an amount equal
to three months' rent under the Lease in favor of Landlord to secure payment by
Tenant of the Rent and all other charges or payments to be paid hereunder and
the performance of the covenants and obligations contained therein, and the
Letter of Credit shall be renewed at least 30 days prior to any expiration
thereof. Such Letter of Credit shall be in form and substance satisfactory to
the Lender and shall be issued by a commercial bank acceptable to Landlord and
shall be released to Tenant when both Tenant's Fixed Charge Coverage Ratio (as
defined below) has been greater than 1.50 to 1.00 and Tenant's ratio of
Indebtedness to Consolidated Tangible Net Worth shall have been not more than
1.35 to 1.00 for four consecutive quarters, provided an Event of Default does
not then exist. Upon such release, Section (a)(iii) of Exhibit E of the Lease
shall be amended to read in its entirety as follows:
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"(iii) Maintain at all times on a consolidated
basis a ratio of Indebtedness to Consolidated Tangible Net
Worth of not more than 1.35 to 1.00."
For purposes of this Section 2, "Fixed Charge Coverage Ratio" means (a) income
before income taxes plus fixed charges, divided (b) by fixed charges. Fixed
charges consist of interest expense (including amortization of deferred
financing costs) and the portion of rental expense that is representative of an
interest factor.
3. AMENDMENTS TO LEASE. The Lease is hereby amended as follows:
A. Paragraph 22(a)(xiv) of the Lease is hereby amended to add
the phrase "or with respect to the Letter of Credit" to the second (2nd) line of
such Paragraph immediately following the phrase "the Warrant Agreement."
B. Section 23 of the Lease is hereby amended to add the
following new Paragraph 23(l) to the end of such Section:
"(l) Landlord shall be entitled to apply the proceeds from
the Letter of Credit to any amounts due under Paragraph
23(a) if this Lease shall be terminated, or, if this Lease
shall remain in full force and effect, to any amounts due
under Paragraph 23(b), or in the following order (i) to past
due Basic Rent, (ii) to cure any other monetary Event of
Default and (iii) to installments of Basic Rent in inverse
order of maturity commencing with the last installment of
the Term."
4. LEASE IN FULL FORCE AND EFFECT. Except as specifically amended
by this Agreement, the Lease shall remain unmodified and in full force and
effect.
5. COUNTERPARTS. This Amendment may be executed in one or more
counterparts which together shall constitute one and the same agreement among
the parties.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Tenant and Landlord have executed this Amendment
as of the date first written above.
"Tenant"
THE TITAN CORPORATION,
a Delaware Corporation
By: /s/ Gene W. Ray
---------------
Its: President and CEO
-----------------
"Landlord"
TORREY PINES LIMITED PARTNERSHIP,
a California limited partnership
By: TORREY PINES (CA) QRS 10-6, INC.
Its: General Partner
By: /s/ Barclay Jones
-----------------
Its: Executive Vice President
------------------------
CONSENT OF LENDER
The Northwestern Mutual Life Insurance Company ("Lender") hereby
consents to this First Amendment to Lease as of the date first written above.
"Lender"
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
By:
-------------------------
Its:
--------------------
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[Northwestern Mutual Life Letterhead]
The Titan Corporation
3033 Science Park Drive
San Diego, CA 92121
Re: NML Loan 331527
Lease Agreement Dated July 1, 1991 (the "Lease Agreement")
between The Titan Corporation, as Tenant
and Torrey Pines Limited Partnership, as Landlord
Gentlemen:
We are in receipt of a copy of a First Amendment to Lease Agreement entered
into as of September 30, 1995 between The Titan Corporation, as Tenant and
Torrey Pines Limited Partnership, as Landlord (the "Amendment"). The
Northwestern Mutual Life Insurance Company, being the "Lender" referenced in the
Lease Agreement hereby consents to the First Amendment. Such consent is given
with the understanding that Landlord, Tenant and Lender will, within the next
thirty days, enter into such further amendment of the Lease Agreement and loan
documentation, satisfactory to each in its discretion, in order to assign the
"Letter of Credit" to the Lender, and shall take such actions as shall be
required to perfect such assignment.
Sincerely,
/s/ Richard F. Von Haden
Richard F. Von Haden
Director, Real Estate Production
cc: Torrey Pines Limited Partnership
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report included in this registration statement and to the incorporation by
reference in this registration statement of our reports dated February 28, 1996
and July 31, 1996, included in the Titan Corporation's Form 10K for the year
ended December 31, 1995 and Form 8-K/A dated August 7, 1996, respectively, and
to all references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
San Diego, California
October 22, 1996
